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CHAPTER 4
HEADS OF INCOME
CHAPTER OVERVIEW
HEADS OF INCOME
Income from Profits and gains Income from

house from business Capital
Salaries Other
property or profession Gains
sources
Charging
Section 15 22 28 45 56
Deeming 46, 46A,

- 25A & 27 41 50B, 50C, 59
provisions
50CA, 50D
Deductions 48(i), (ii)

allowable 16 24 30 to 37 57
& 54
Deductions Last proviso

not - 25 40 & 40A to 58
allowable section 48
29, 38, 43, 43A,

Other 47, 47A,
43B, 43CA, 44AA, -
provisions 17 23 & 26 49, 51,
44AB, 44AD,
55 & 55A
44ADA & 44AE
© The Institute of Chartered Accountants of India

4.2 INCOME TAX LAW
HEADS OF INCOME
UNIT-1: SALARIES
LEARNING OUTCOMES
After reading this unit, you will be able to:
r identify the point of time when salary income is chargeable to
tax.
r comprehend the meaning of salary, profits in lieu of salary,
allowances, perquisite and various retirement benefits.
r identify the allowances and perquisites exempt from tax.
r determine the taxable portion of retirement benefits,
allowances and other benefits which form part of salary.
r determine the value of perquisites chargeable to tax under
the head “Salaries”.
r know the admissible deductions from salary.
r compute the income chargeable to tax under the head
“Salaries”.

HEADS OF INCOME 4.3
Proforma for computation of income under the head “Salaries”

Particulars Amount
(i) Basic Salary xxx
(ii) Fees/Commission xxx
(iii) Bonus xxx
(iv) Allowances:
(a) Dearness Allowance xxx
(b) House Rent Allowance xxx
Less: Least of the following is exempt
HRA actually received xxx
Rent paid (-)10% of salary for the xxx
relevant period
50%/40% of salary for the relevant xxx xxx
period
(c) Children Education Allowance xxx
Less: 100 per month per child upto
maximum of two children xxx xxx
(d) Children Hostel Allowance xxx
Less: 300 per month per child upto
maximum of two children xxx xxx
(e) Transport allowance xxx
Less: 1,600 per month (3,200 in case
of blind or deaf and dumb or xxx xxx
orthopedically handicapped
employee)
(f) Entertainment Allowance xxx
(g) Other Allowances xxx
(v) Taxable Perquisites
(a) Valuation of rent free accommodation
If accommodation owned by the employer
(i) Cities having population > 25 lakh
15% of salary (–) rent recovered from employee
(ii) Cities having population > 10 lakh < 25 lakh
10% of salary (–) rent recovered from employee
(iii) In other cities
7.5% of salary (-) rent recovered from employee

4.4 INCOME TAX LAW
If accommodation taken on lease by the employer

Lower of the following
Rent paid by the employer or
15% of salary
Less: rent recovered from the employee xxx
(b) Valuation of use of motor car xxx
(c) Any other perquisite xxx
(vi) Taxable annuity or uncommuted pension xxx
(vii) Taxable Commuted pension xxx
(viii) Taxable Gratuity xxx
(ix) Leave encashment xxx
(x) Leave travel concession/Voluntary retirement xxx
compensation/Retrenchment compensation etc.
(xi) Professional tax, if paid by the employer xxx
Gross Salary xxx
Less: Entertainment allowance (only for Govt employees) xxx
Less: Professional Tax xxx xxx
Income under the head salary xxx
1.1 INTRODUCTION
The provisions pertaining to Income under the head “Salaries” are contained in section
15, 16 and 17 in the following manner.

HEADS OF INCOME 4.5
Before learning the provisions, it is essential to understand the important concepts

relating to Salaries.
(1) Employer-employee relationship: Every payment made by an employer to
his employee for service rendered would be chargeable to tax as income from
salaries. Before an income can become chargeable under the head ‘salaries’, it is
vital that there should exist between the payer and the payee, the relationship of
an employer and an employee.
Examples:
(a) Sujatha, an actress, is employed in Chopra Films, where she is paid a
monthly remuneration of ` 2 lakh. She acts in various films produced by
various producers. The remuneration for acting in such films is directly paid
to Chopra Films by the different producers.
In this case, ` 2 lakh will constitute salary in the hands of Sujatha, since the
relationship of employer and employee exists between Chopra Films and
Sujatha.
(b) In the above example, if Sujatha acts in various films and gets fees from
different producers, the same income will be chargeable as income from
profession since the relationship of employer and employee does not exist
between Sujatha and the film producers.
(c) Commission received by a Director from a company is salary if the Director
is an employee of the company. If, however, the Director is not an employee
of the company, the said commission cannot be charged as salary but has
to be charged either as income from business or as income from other
sources depending upon the facts.
(d) Salary paid to a partner by a firm is nothing but an appropriation of profits.
Any salary, bonus, commission or remuneration by whatever name called
due to or received by partner of a firm shall not be regarded as salary.
The same is to be charged as income from profits and gains of business or
profession. This is primarily because the relationship between the firm and
its partners is not that of an employer and employee.
(2) Full-time or part-time employment: Once the relationship of employer and
employee exists, the income is to be charged under the head “salaries”. It does
not matter whether the employee is a full-time employee or a part-time one.
If, for example, an employee works with more than one employer, salaries received
from all the employers should be clubbed and brought to charge for the relevant
previous years.
(3) Foregoing of salary: Once salary accrues, the subsequent waiver by the
employee does not absolve him from liability to income-tax. Such waiver is only
an application and hence, chargeable to tax.
4.6 INCOME TAX LAW
Example:
Mr. A, an employee instructs his employer that he is not interested in receiving the
salary for April 2017 and the same might be donated to a charitable institution.
In this case, Mr. A cannot claim that he cannot be charged in respect of the salary
for April 2017. It is only due to his instruction that the donation was made to a
charitable institution by his employer. It is only an application of income.
Hence, the salary for the month of April 2017 will be taxable in the hands of Mr.
A. He is however, entitled to claim a deduction under section 80G for the amount
donated to the institution. [The concept of deductions is explained in detail in
Chapter 7].
(4) Surrender of salary: However, if an employee surrenders his salary to the Central
Government under section 2 of the Voluntary Surrender of Salaries (Exemption
from Taxation) Act, 1961, the salary so surrendered would be exempt while
computing his taxable income.
(5) Salary paid tax-free: This, in other words, means that the employer bears the
burden of the tax on the salary of the employee. In such a case, the income from
salaries in the hands of the employee will consist of his salary income and also
the tax on this salary paid by the employer.
However, as per section 10(10CC), the income-tax paid by the employer on non-
monetary perquisites on behalf of the employee would be exempt in the hands
of the employee.
(6) Place of accrual of salary: Under section 9(1)(ii), salary earned in India is deemed
to accrue or arise in India even if it is paid outside India or it is paid or payable
after the contract of employment in India comes to an end.
If an employee gets pension paid abroad in respect of services rendered in India,
the same will be deemed to accrue in India. Similarly, leave salary paid abroad in
respect of leave earned in India is deemed to accrue or arise in India.
Example:
Suppose, Mr. A, a citizen of India is posted in the United States as our Ambassador.
Obviously, he renders his services outside India. He also receives his salary outside
India. He is also a non-resident. The question, therefore, arises whether he can
claim exemption in respect of his salary paid by the Government of India to him
outside India.
Section 9(1)(iii) provides that salaries payable by the Government to a citizen
of India for services outside India shall be deemed to accrue or arise in India.
However, by virtue of section 10(7), any allowance or perquisites paid or allowed
outside India by the Government to a citizen of India for rendering services
outside India will be fully exempt.
HEADS OF INCOME 4.7
Now, let us discuss the chargeability section 15, the provisions explaining the
meaning of Salary, Perquisites and Profits in lieu of salary contained in section 17
and the deductions under section 16.
1.2 BASIS OF CHARGE (SECTION 15)

(i) Section 15 deals with the basis of charge. Salary is chargeable to tax either on
‘due’ basis or on ‘receipt’ basis, whichever is earlier.
(ii) However, where any salary, paid in advance, is assessed in the year of payment, it
cannot be subsequently brought to tax in the year in which it becomes due.
(iii) If the salary paid in arrears has already been assessed on due basis, the same
cannot be taxed again when it is paid.
Examples:
(a) If A draws his salary in advance for the month of April 2018 in the month
of March 2018 itself, the same becomes chargeable on receipt basis and is
to be assessed as income of the P.Y.2017-18 i.e., A.Y.2018-19. However, the
salary for the A.Y.2019-20 will not include that of April 2018.
(b) If the salary due for March 2018 is received by A later in the month of April
2018, it is still chargeable as income of the P.Y.2017-18 i.e., A.Y.2018-19 on
due basis. Obviously, salary for the A.Y.2019-20 will not include that of
March 2018.
1.2.1 Advance Salary
Advance salary is taxable when it is received by the employee irrespective of the fact
whether it is due or not. It may so happen that when advance salary is included and
charged in a particular previous year, the rate of tax at which the employee is assessed
may be higher than the normal rate of tax to which he would have been assessed.
Section 89(1) provides for relief in these types of cases. The concept of relief under
section 89(1) is explained in this unit.
Difference between advance salary and advance against salary
Loan is different from salary. When an employee takes a loan from his employer, which
is repayable in certain specified installments, the loan amount cannot be brought to
tax as salary of the employee.
Similarly, advance against salary is different from advance salary. It is an advance taken
by the employee from his employer. This advance is generally adjusted with his salary
over a specified time period. It cannot be taxed as salary.
1.2.2 Arrears of salary
Normally speaking, salary arrears must be charged on due basis. However, there are
circumstances when it may not be possible to bring the same to charge on due basis.

4.8 INCOME TAX LAW
Example:
If the Pay Commission is appointed by the Central Government and it recommends
revision of salaries of employees, the arrears received in that connection will be charged
on receipt basis. Here also, relief under section 89(1) is available.
1.3 SALARY, PERQUISITE AND PROFITS IN LIEU OF

SALARY (SECTION 17)
1.3.1 Meaning of Salary

The meaning of the term ‘salary’ for purposes of income tax is much wider than what
is normally understood. The term ‘salary’ for the purposes of Income-tax Act, 1961 will
include both monetary payments (e.g. basic salary, bonus, commission, allowances
etc.) as well as non-monetary facilities (e.g. housing accommodation, medical facility,
interest free loans etc).
Section 17(1), defined the term “Salary”. It is an inclusive definition and includes
monetary as well as non-monetary items.
‘Salary’ under section 17(1), includes the following:
(i) wages,
(ii) any annuity or pension,
(iii) any gratuity,
(iv) any fees, commission, perquisite or profits in lieu of or in addition to any
salary or wages,
(v) any advance of salary,
(vi) any payment received in respect of any period of leave not availed by him i.e.
leave salary or leave encashment,

HEADS OF INCOME 4.9
(vii) Provident Fund:

- the portion of the annual accretion in any previous year to the balance at
the credit of an employee participating in a recognised provident fund to
the extent it is taxable and
- transferred balance in recognized provident fund to the extent it is
taxable,
(viii) the contribution made by the Central Government or any other employer in
the previous year to the account of an employee under a pension scheme
referred to in section 80CCD.
(1) Wages
In common parlance, the term “wages” means fixed regular payment earned for
work or services. The words “wages”, “salary”, “basic salary” are used interchangeably.
Moreover, the payments in the form of Bonus, Allowances etc. made to the employee
are also included within the meaning of salary.
Under the Income-tax Act, there are certain payments made which are fully taxable,
partly taxable and fully exempt. For Example, wages, salary, bonus, dearness allowance
etc. are fully taxable payments. Whereas monetary benefits in the form of allowances
such as House Rent Allowance, conveyance allowance etc. are partially taxable.
Allowances
Different types of allowances are given to employees by their employers. Generally
allowances are given to employees to meet some particular requirements like house
rent, expenses on uniform, conveyance etc. Under the Income-tax Act, 1961, allowance
is taxable on due or receipt basis, whichever is earlier. Various types of allowances
normally in vogue are discussed below:
Allowances
Fully Taxable Partly Taxable Fully Exempt
(i) Entertainment (i) House Rent (i) Allowances to High
Allowance Allowance [u/s Court Judges
(ii) Dearness Allowance 10(13A)] (ii) Allowance paid by
(iii) Overtime Allowance (ii) Special the United Nations
(iv) Fixed Medical Allowances [u/s Organization.
Allowance 10(14)] (iii) Compensatory
(v) City Compensatory Allowance received by
Allowance (to meet a judge
increased cost of living (iv) Sumptuary allowance
in cities) granted to High Court
(vi) Interim Allowance or Supreme Court
Judges
4.10 INCOME TAX LAW
Allowances
Fully Taxable Partly Taxable Fully Exempt
(vii) Servant Allowance (v) Allowance granted
(viii) Project Allowance to Government
(ix) Tiffin/Lunch/Dinner employees outside
Allowance India.
(x) Any other cash
allowance
(xi) Warden Allowance
(xii) Non-practicing
Allowance
(A) Allowances which are fully taxable
(1) City compensatory allowance: City Compensatory Allowance is normally
intended to compensate the employees for the higher cost of living in cities. It is
taxable irrespective of the fact whether it is given as compensation for performing
his duties in a particular place or under special circumstances.
(2) Entertainment allowance: This allowance is given to employees to meet the
expenses towards hospitality in receiving customers etc. The Act gives a deduction
towards entertainment allowance only to a Government employee. The details of
deduction permissible are discussed later on in this Unit.
(B) Allowances which are partially taxable
(1) House rent allowance [Section 10(13A)]: HRA is a special allowance specifically
granted to an employee by his employer towards payment of rent for residence
of the employee. HRA granted to an employee is exempt to the extent of least of
the following:
Metro Cities (i.e. Delhi, Kolkata,
Other Cities
Mumbai, Chennai)
1) HRA actually received. 1) HRA actually received
2) Rent paid -10% of salary for 2) Rent paid - 10% of salary for the
the relevant period relevant period
3) 50% of salary for the relevant 3) 40% of salary for the relevant period
period
Notes:
1. Exemption is not available to an assessee who lives in his own house, or in
a house for which he has not incurred the expenditure of rent.

HEADS OF INCOME 4.11
2. Salary for this purpose means basic salary, dearness allowance, if provided
in terms of employment and commission as a fixed percentage of turnover.
3. Relevant period means the period during which the said accommodation
was occupied by the assessee during the previous year.
ILLUSTRATION 1
Mr. Raj Kumar has the following receipts from his employer:
(1) Basic pay ` 3,000 p.m.
(2) Dearness allowance (D.A.) ` 600 p.m.
(3) Commission ` 6,000 p.a.
(4) Motor car for personal use (expenditure met by the employer) ` 500 p.m
(5) House rent allowance ` 900 p.m.
Find out the amount of HRA eligible for exemption to Mr. Raj Kumar assuming that he
paid a rent of ` 1,000 p.m. for his accommodation at Kanpur. DA forms part of salary for
retirement benefits.
SOLUTION
HRA received ` 10,800
Less: Exempt under section 10(13A) [Note] ` 7,680
Taxable HRA ` 3,120
Note : Exemption shall be least of the following three limits:
(a) the actual amount received (` 900 × 12) = ` 10,800
(b) excess of the actual rent paid by the assessee over 10% of his salary
= Rent Paid - 10% of salary for the relevant period
= (` 1,000×12) - 10% of [(` 3,000+` 600 ) × 12] = ` 12,000 - ` 4,320 = ` 7,680
(c) 40% salary as his accommodation is situated at kanpur
= 40% of [(` 3,000+ ` 600) × 12] = ` 17,280
Note: For the purpose of exemption under section 10(13A), salary includes dearness
allowance only when the terms of employment so provide, but excludes all other
allowances and perquisites.
ILLUSTRATION 2
Mr. Mohit is employed with XY Ltd. on a basic salary of ` 10,000 p.m. He is also entitled
to dearness allowance @ 100% of basic salary, 50% of which is included in salary as
per terms of employment. The company gives him house rent allowance of ` 6,000 p.m.
which was increased to ` 7,000 p.m. with effect from 1.01.2018. He also got an increment
of ` 1,000 p.m. in his basic salary with effect from 1.02.2018. Rent paid by him during the
previous year 2017-18 is as under:

4.12 INCOME TAX LAW
April and May, 2017 - Nil, as he stayed with his parents

June to October, 2017 - ` 6,000 p.m. for an accommodation in Ghaziabad
November, 2017 to March, 2018 - ` 8,000 p.m. for an accommodation in Delhi.
Compute his gross salary for assessment year 2018-19.
SOLUTION
Computation of gross salary of Mr. Mohit for A.Y. 2018-19
Particulars `
Basic salary [(` 10,000 × 10) + (` 11,000 × 2)] 1,22,000
Dearness Allowance (100% of basic salary) 1,22,000
House Rent Allowance (See Note below) 21,300
Gross Salary 2,65,300
Note: Computation of Taxable House Rent Allowance (HRA)
Particulars Feb-
April-May June-Oct Nov-Dec Jan March
(`) (`) (`) (`) (`)
Basic salary per 10,000 10,000 10,000 10,000 11,000
month
Dearness
allowance
(included in salary
as per terms of
employment) 5,000 5,000 5,000 5,000 5,500
(50% of basic
salary)
Salary per month
for the purpose
of computation
of house rent 15,000 15,000 15,000 15,000 16,500
allowance
Relevant period 2 5 2 1 2
(in months)
Salary for the 30,000 75,000 30,000 15,000 33,000
relevant period
(Salary per month
× relevant period)

Particulars Feb-
April-May June-Oct Nov-Dec Jan March
(`) (`) (`) (`) (`)
Rent paid for the Nil 30,000 16,000 8,000 16,000
relevant period (`6,000×5) (`8,000×2) (`8,000×1) (`8,000×2)
House rent
allowance (HRA)
12,000 30,000 12,000 7,000 14,000
received during
(`6,000×2) (`6,000×5) (`6,000×2) (`7,000×1) (`7,000×2)
the relevant
period (A)
Least of the
following is
exempt [u/s
10(13A)]
1. Actual HRA 12,000 30,000 12,000 7,000 14,000
received
2. Rent paid – N.A. 22,500 13,000 6,500 12,700
10% of salary
3. 40% of salary N.A. 30,000 15,000 7,500 16,500
(Residence at (40% × (50% × (50% × (50% ×
Ghaziabad–June ` 75,000) ` 30,000) ` 15,000) ` 33,000)
to Oct, 2017)
50% of salary
(Residence at
Delhi–Nov’17-
March’18)
Exempt HRA (B) Nil 22,500 12,000 6,500 12,700
Taxable HRA
(Actual HRA – 12,000 7,500 Nil 500 1,300
Exempt HRA)
(A-B)
Taxable HRA (total) = ` 12,000 + ` 7,500 + ` 500 + ` 1,300 = ` 21,300
(2) Special allowances to meet expenses relating to duties or personal expenses
[Section 10(14)]
This clause provides for exemption (as per Rule 2BB) in respect of the following:
(i) Special allowances or benefit not being in the nature of a perquisite,
specifically granted to meet expenses incurred wholly, necessarily and
exclusively in the performance of the duties of an office or employment of
profit [Section 10(14)(i)]
4.14 INCOME TAX LAW
For the allowances under this category, there is no limit on the amount
which the employee can receive from the employer, but whatever
amount is received should be fully utilized for the purpose for which it was
given to him.
(ii) Special allowances granted to the assessee either to meet his personal
expenses at the place where the duties of his office or employment of profit
are ordinarily performed by him or at the place where he ordinarily resides
or to compensate him for the increased cost of living. [Section 10(14)(ii)]
For the allowances under this category, there is a limit on the amount
which the employee can receive from the employer. Any amount
received by the employee in excess of these specified limits will be taxable
in his hands as income from salary for the year. It does not matter whether
the amount which is received is actually spent or not by the employee for
the purpose for which it was given to him.
Rule 2BB
The following allowances have been prescribed in Rule 2BB:
Allowances prescribed for the purposes of section 10(14)(i)
(a) any allowance granted to meet the cost of travel on tour or on transfer
(Travelling Allowance);
Explanation - “allowance granted to meet the cost of travel on transfer”
includes any sum paid in connection with the transfer, packing and
transportation of personal effects on such transfer.
(b) any allowance, whether granted on tour or for the period of journey in
connection with transfer, to meet the ordinary daily charges incurred by an
employee on account of absence from his normal place of duty;
(c) any allowance granted to meet the expenditure incurred on conveyance in
performance of duties of an office or employment of profit (Conveyance
Allowance);
(d) any allowance granted to meet the expenditure incurred on a helper where
such helper is engaged in the performance of the duties of an office or
employment of profit (Helper Allowance);
(e) any allowance granted for encouraging the academic research and training
pursuits in educational and research institutions;
(f) any allowance granted to meet the expenditure on the purchase or
maintenance of uniform for wear during the performance of the duties of
an office or employment of profit (Uniform Allowance).

Allowances prescribed for the purposes of section 10(14)(ii)

S. Name of Allowance Extent to which
No. allowance is exempt
1. Any Special Compensatory Allowance in ` 800 or ` 7,000 or ` 300
the nature of Special Compensatory (Hilly per month depending
Areas) Allowance or High Altitude Allowance upon the specified
or Uncongenial Climate Allowance or Snow locations
Bound Area Allowance or Avalanche Allowance
2. Any Special Compensatory Allowance in the ` 1,300 or ` 1,100 or
nature of border area allowance or remote ` 1,050 or ` 750 or
locality allowance or difficult area allowance` 300 or ` 200 per
or disturbed area allowance month depending
upon the specified
locations.
3. Special Compensatory (Tribal Areas / Schedule ` 200 per month.
Areas / Agency Areas) Allowance
4. Any allowance granted to an employee working 70% of such allowance
in any transport system to meet his personal upto a maximum of
expenditure during his duty performed in the ` 10,000 per month.
course of running such transport from one
place to another, provided that such employee
is not in receipt of daily allowance
5. Children Education Allowance ` 100 per month per
child upto a maximum
of two children.
6. Any allowance granted to an employee to meet ` 300 per month per
the hostel expenditure on his child child upto a maximum
of two children.
7. Compensatory Field Area Allowance ` 2,600 per month in
specified areas.
8. Compensatory Modified Field Area ` 1,000 per month in
Allowance specified areas.

4.16 INCOME TAX LAW
S. Name of Allowance Extent to which

No. allowance is exempt
9. Any special allowance in the nature of counter ` 3,900 per month
insurgency allowance granted to the members
of the armed forces operating in areas away
from their permanent locations.
Any assessee claiming exemption in respect
of allowances mentioned at serial numbers 7,
8 and 9 shall not be entitled to exemption in
respect of the allowance referred to at serial
number 2.
10. Any transport allowance granted to an ` 1,600 per month
employee (other than those referred to in Sl.
No. 11 below) to meet his expenditure for the
purpose of commuting between the place of
his residence and the place of his duty
11. Any transport allowance granted to an ` 3,200 per month.
employee who is blind or deaf and dumb
or orthopedically handicapped with disability
of the lower extremities of the body, to meet
his expenditure for commuting between his
residence and place of duty
12. Underground Allowance would be granted to ` 800 per month
an employee who is working in uncongenial,
unnatural climate in underground mines. This
is applicable to whole of India.
ILLUSTRATION 3
Mr. Srikant has two sons. He is in receipt of children education allowance of ` 150 p.m.
for his elder son and ` 70 p.m. for his younger son. Both his sons are going to school. He
also receives the following allowances:
Transport allowance : ` 1,800 p.m.
Tribal area allowance : ` 500 p.m.
Compute his taxable allowances.
SOLUTION
Taxable allowance in the hands of Mr. Srikant is computed as under -
Children Education Allowance:
Elder son [(` 150 – ` 100) p.m. × 12 months] = ` 600
Younger son [(` 70 – ` 70) p.m. × 12 months] = Nil ` 600
Transport allowance [(` 1,800 – ` 1,600) p.m. × 12 months] ` 2,400

Tribal area allowance [(` 500 – ` 200) p.m. × 12 months] ` 3,600
Taxable allowances ` 6,600
(C) Allowances which are fully exempt
(1) Allowance to High Court Judges: Any allowance paid to a Judge of a High
Court under section 22A(2) of the High Court Judges (Conditions of Service) Act,
1954 is not taxable.
(2) Allowance received from United Nations Organisation (UNO): Allowance
paid by the UNO to its employees is not taxable by virtue of section 2 of the
United Nations (Privileges and Immunities) Act, 1947.
(3) Compensatory allowance under Article 222(2) of the Constitution:
Compensatory allowance received by judge under Article 222(2) of the
Constitution is not taxable since it is neither salary not perquisite1.
(4) Sumptuary allowance: Sumptuary allowance given to High Court Judges
under section 22C of the High Court Judges (Conditions of Service) Act, 1954
and Supreme Court Judges under section 23B of the Supreme Court Judges
(Conditions of Service) Act, 1958 is not chargeable to tax.
(5) Allowances payable outside India [Section 10(7)]
Allowances or perquisites paid or allowed as such outside India by the Government
to a citizen of India for services rendered outside India are exempt from tax.
Students may remember that in such cases under section 9(1)(iii), the income
chargeable under the head ‘Salaries’ is deemed to accrue in India. The residential
status of the recipient will, however, not affect this exemption.
Exemption of specified allowances and perquisites paid to Chairman or a retired
Chairman or any other member or retired member of the UPSC [Section 10(45)]
(i) Under the Income-tax Act, 1961, perquisites and allowances received by an
employee are taxable under the head “Salaries” unless they are specifically
exempted.
(ii) Section 10(45) exempts specified allowances and perquisites received by Chairman
or any other member, including retired Chairman/member, of the Union Public
Service Commission (UPSC).
(iii) The exemption would be available in respect of such allowances and perquisites
as may be notified by the Central Government in this behalf.
(iv) Accordingly, the Central Government has notified the following allowances and
perquisites for serving Chairman and members of UPSC, for the purpose of
exemption under section 10(45) -
(1) the value of rent free official residence,
1 Bishamber Dayalv. CIT [1976] 103 ITR 813 (MP).

4.18 INCOME TAX LAW
(2) the value of conveyance facilities including transport allowance,

(3) the sumptuary allowance and
(4) the value of leave travel concession.
In case of retired Chairman and retired members of UPSC, the following have been
notified for exemption under section 10(45):
(i) a sum of maximum ` 14,000 per month for defraying the service of an orderly
and for meeting expenses incurred towards secretarial assistance on contract
basis.
(ii) the value of a residential telephone free of cost and the number of free calls to
the extent of ` 1,500 pm (over and above free calls per month allowed by the
telephone authorities)
Note – Tax exemption is also available in respect of certain specified perquisites enjoyed
by Chief Election Commissioner/Election Commissioner and judges of Supreme Court
on account of the enabling provisions in the respective Acts which govern their service
conditions.
(2) Annuity or Pension

Meaning of Annuity
• As per the definition, ‘annuity’ is treated as salary. Annuity is a sum payable in
respect of a particular year. It is a yearly grant. If a person invests some money
entitling him to series of equal annual sums, such annual sums are annuities in
the hands of the investor.
• Annuity received by a present employer is to be taxed as salary. It does not matter
whether it is paid in pursuance of a contractual obligation or voluntarily.
• Annuity received from a past employer is taxable as profit in lieu of salary.
• Annuity received from person other than an employer is taxable as “income from
other sources”.
Pension
Concise Oxford Dictionary defines ‘pension’ as a periodic payment made especially by
Government or a company or other employers to the employee in consideration of
past service payable after his retirement.
Pension is of two types: commuted and uncommuted.
• Uncommuted Pension: Uncommuted pension refers to pension received
periodically. It is fully taxable in the hands of both government and non-
government employees.
• Commuted Pension: Commutation means inter-change. Commuted pension

means lump sum amount taken by commuting the whole or part of the pension.
Many persons convert their future right to receive pension into a lumpsum
amount receivable immediately.
Example:
Suppose a person is entitled to receive a pension of say ` 2000 p.m. for the rest of
his life. He may commute ¼th i.e., 25% of this amount and get a lumpsum of say
` 30,000. After commutation, his pension will now be the balance 75% of ` 2,000 p.m. =
` 1,500 p.m.
Exemption in respect of Commuted Pension [section 10(10A)]
As per section 10(10A), the payment in respect of commuted pension is exempt, subject
to the conditions specified therein. Its treatment is discussed below:
(a) Employees of the Central Government/local authorities/Statutory
Corporation/ members of the Defence Services: Any commuted pension
received is fully exempt from tax.
(b) Non-Government Employee: Any commuted pension received is exempt from
tax in the following manner:
If the employee is in receipt of gratuity,
Exemption = 1/3rd of the amount of pension which he would have received had
he commuted the whole of the pension.
If the employee does not receive any gratuity

Exemption = ½ of the amount of pension which he would have received had he
commuted the whole of the pension.
Notes:
1. Judges of the Supreme Court and High Court will be entitled to exemption of the
commuted portion not exceeding ½ of the pension.
2. Any commuted pension received by an individual out of annuity plan of the Life
Insurance Corporation of India (LIC) from a fund set up by that Corporation will
be exempted.

4.20 INCOME TAX LAW
ILLUSTRATION 4
Mr. Sagar retired on 1.10.2017 receiving ` 5,000 p.m. as pension. On 1.2.2018, he
commuted 60% of his pension and received ` 3,00,000 as commuted pension. You are
required to compute his taxable pension assuming:
a. He is a government employee.
b. He is a non-government employee, receiving gratuity of ` 5,00,000 at the time of
retirement.
c. He is a non-government employee and is not in receipt of gratuity at the time of
retirement.
SOLUTION
(a) He is a government employee.
Uncommuted pension received (October – March) ` 24,000
[(` 5,000 × 4 months) + (40% of ` 5,000 × 2 months)]
Commuted pension received ` 3,00,000
Less : Exempt u/s 10(10A) ` 3,00,000 NIL
Taxable pension ` 24,000

(b) He is a non-government employee, receiving gratuity ` 5,00,000 at the time

of retirement.
[(` 5,000 × 4 months) + (40% of ` 5,000 × 2 months)]
Less: Exempt u/s 10(10A)
` 1,66,667 ` 1,33,333
Taxable pension ` 1,57,333
(c) He is a non-government employee and is not in receipt of gratuity at the
time of retirement.
[ (` 5,000 × 4 months) + (40% of ` 5,000 × 2 months)]
Less: Exempt u/s 10(10A)
` 2,50,000 ` 50,000
Taxable pension ` 74,000
(3) Gratuity
Gratuity is a voluntary payment made by an employer in appreciation of services
rendered by the employee. Now-a-days gratuity has become a normal payment
applicable to all employees. In fact, Payment of Gratuity Act, 1972 is a statutory
recognition of the concept of gratuity. Almost all employers enter into an agreement
with employees to pay gratuity.
Exemption in respect of Gratuity [Section 10(10)]
Its treatment is discussed below:
1. Retirement gratuity received under the Pension Code Regulations applicable to
members of the Defence Service is fully exempt from tax.
2. Central / State Government Employees: Any death cum retirement gratuity is
fully exempt from tax.
3. Non-government employees:
(i) Non-government employees covered by the Payment of Gratuity Act,
1972
Any death-cum-retirement gratuity is exempt from tax to the extent of least
of the following:

4.22 INCOME TAX LAW
(i) ` 10,00,000
(ii) Gratuity actually received
(iii) 15 days’ salary based on last drawn salary for each completed year of
service or part thereof in excess of 6 months
Note: Salary for this purpose means basic salary and dearness allowance.
No. of days in a month for this purpose, shall be taken as 26.
(ii) Non-government employees not covered by the Payment of Gratuity
Act, 1972
Any death cum retirement gratuity is exempt from tax to the extent of least
of the following:
(i) ` 10,00,000
(iii) Half month’s salary (based on last 10 months’ average salary
immediately preceding the month of retirement or death) for each
completed year of service (fraction to be ignored)
Note: Salary for this purpose means basic salary and dearness allowance,
if provided in the terms of employment for retirement benefits, forming
part of salary and commission which is expressed as a fixed percentage of
turnover.
Students must also note the following points:
(1) Gratuity received during the period of service is fully taxable.
(2) Where gratuity is received from 2 or more employers in the same year then
aggregate amount of gratuity exempt from tax cannot exceed ` 10,00,000.
(3) Where gratuity is received in any earlier year from former employer and
again received from another employer in a later year, the limit of ` 10,00,000
will be reduced by the amount of gratuity exempt earlier.
(4) The exemption in respect of gratuities would be available even if the gratuity
is received by the widow, children or dependents of a deceased employee.

Gratuity
Received during Received at the

service time of
retirement/Death
Fully Taxable
Government Non-Government
Employees Employees
Fully Exempt
Covered under Not covered
Payment of under payment
Gratuity Act, of Gratuity Act,
1972 1972
Least of the following Least of the following

would be exempt: would be exempt:
- ` 10 lakh - ` 10 lakh
- Gratuity received - Gratuity received
- 15 days salary (based - Half month salary
on last drawn salary) (based on avg of last 10
for every completed months salary) for every
year of service or part completed year of
in excess of 6 months service (No. of days in a
(No. of days in a month month to be taken as 30)
to be taken as 26)
ILLUSTRATION 5
Mr. Ravi retired on 15.6.2017 after completion of 26 years 8 months of service and
received gratuity of ` 6,00,000. At the time of retirement, his salary was:
Basic Salary : ` 5,000 p.m.
Dearness Allowance : ` 3,000 p.m. (60% of which is for retirement benefits)
Commission : 1% of turnover (turnover in the last 12 months was ` 12,00,000)
Bonus : ` 12,000 p.a.
Compute his taxable gratuity assuming:
(a) He is non-government employee and covered by the Payment of Gratuity Act 1972.
(b) He is non-government employee and not covered by Payment of Gratuity Act 1972.
(c) He is a Government employee.

4.24 INCOME TAX LAW
SOLUTION
(a) He is covered by the Payment of Gratuity Act 1972.
Gratuity received at the time of retirement ` 6,00,000
Less: Exemption under section 10(10)
Least of the following:
i. Gratuity received ` 6,00,000
ii. Statutory limit ` 10,00,000
iii. 15 days salary based on last drawn
salary for each completed year of service
or part thereof in excess of 6 months
` 1,24,615 ` 1,24,615
Taxable Gratuity ` 4,75,385

(b) He is not covered by the Payment of Gratuity Act 1972.
Less: Exemption under section 10(10) (Note) ` 1,01,400
Taxable Gratuity ` 4,98,600
Note: Exemption under section 10(10) is least of the following:
i. Gratuity received ` 6,00,000
ii. Statutory limit ` 10,00,000
iii. Half month’s salary based on average salary of last 10 months preceding
the month of retirement for each completed year of service.
= ` 1,01,400
(c) He is a government employee
Less : Exemption under section 10(10) ` 6,00,000
Taxable gratuity Nil
(4) Fees, commission, perquisite or profits in lieu of or in addition to any salary

or wages
The payment in the form of fees or commission by the employer to the employee are
fully taxable. Commission may be paid as fixed percentage of turnover or net profits
etc.
Section 17(2) and 17(3) contains the provisions relating to perquisites and profits in
lieu of salary, respectively. The provisions of these sections would be discussed in detail
separately in this unit.
(5) Any Advance of Salary
The concept of “Advance Salary” already discussed in this unit.
(6) Leave Salary or Leave Encashment
Generally, employees are allowed leaves during the period of service. Employee may
avail such leaves or in case the leaves are not availed, then the leaves may either be
lapsed or accumulated for future or allowed to be encashed every year or at the time
termination/ retirement. The payment received on account of encashment of unavailed
leave would be form part of salary. However, section 10(10AA) provides exemption in
respect of amount received by way of encashment of unutilised earned leave by an
employee at the time of his retirement whether on superannuation or otherwise
Exemption of amount received by way of encashment of unutilised earned leave
on retirement [Section 10(10AA)]
The provisions of this clause are mentioned below:
(a) Government employees: Leave salary received at the time of retirement is fully
exempt from tax.
(b) Non-government employees: Leave salary received at the time of retirement is
exempt from tax to the extent of least of the following:
(i) ` 3,00,000
(ii) Leave salary actually received
(iii) 10 months’ salary (on the basis of average salary of last 10 months )
(iv) Cash equivalent of leave (based on last 10 months’ average salary
immediately preceding the date of retirement) to the credit of the employee
at the time of retirement or death. Earned leave entitlement cannot exceed
30 days for every year of actual service rendered for the employer from
whose service he has retired.
Notes:
1. Leave salary received during the period of service is fully taxable.
2. Where leave salary is received from two or more employers in the same year, then
the aggregate amount of leave salary exempt from tax cannot exceed ` 3,00,000.

4.26 INCOME TAX LAW
3. Where leave salary is received in any earlier year from a former employer and
again received from another employer in a later year, the limit of ` 3,00,000 will be
reduced by the amount of leave salary exempt earlier.
4. Salary for this purpose means basic salary and dearness allowance, if provided in
the terms of employment for retirement benefits and commission which is expressed
as a fixed percentage of turnover.
5. ‘Average salary’ will be determined on the basis of the salary drawn during the
period of ten months immediately preceding the date of his retirement whether on
superannuation or otherwise.
ILLUSTRATION 6
Mr. Gupta retired on 1.12.2017 after 20 years 10 months of service, receiving leave salary of
` 5,00,000. Other details of his salary income are:

Basic Salary : ` 5,000 p.m. (` 1,000 was increased w.e.f. 1.4.2017)

Dearness Allowance : ` 3,000 p.m. (60% of which is for retirement benefits)
Commission : ` 500 p.m.
Bonus : ` 1,000 p.m.
Leave availed during service : 480 days
He was entitled to 30 days leave every year.
You are required to compute his taxable leave salary assuming:
(b) He is a non government employee.
SOLUTION
Leave Salary received at the time of retirement ` 5,00,000
Less : Exemption under section 10(10AA) ` 5,00,000
Taxable Leave salary Nil
b) He is a non-government employee
Leave Salary received at the time of retirement ` 5,00,000
Less : Exempt under section 10(10AA) [See Note below] ` 26,400
Taxable Leave Salary ` 4,73,600
Note : Exemption under section 10(10AA) is least of the following:
(i) Leave salary received ` 5,00,000
(ii) Statutory limit ` 3,00,000
(iii) 10 months salary based on average salary of last 10 months
` 66,000
(iv) Cash equivalent of leave standing at the credit of
the employee based on the average salary of last
10 months (max. 30 days per year of service)
Leave Due = Leave allowed – Leave taken
= ( 30 days per year × 20 years ) – 480 days
= 120 days

4.28 INCOME TAX LAW
` 26,400
(7) Provident fund
Provident fund scheme is a scheme intended to give substantial benefits to an employee
at the time of his retirement. Under this scheme, a specified sum is deducted from
the salary of the employee as his contribution towards the fund. The employer also
generally contributes the same amount out of his pocket, to the fund. The contribution
of the employer and the employee are invested in approved securities. Interest earned
thereon is also credited to the account of the employee. Thus, the credit balance in a
provident fund account of an employee consists of the following:
(i) employee’s contribution
(ii) interest on employee’s contribution
(iii) employer’s contribution
(iv) interest on employer’s contribution.
The accumulated balance is paid to the employee at the time of his retirement or
resignation. In the case of death of the employee, the same is paid to his legal heirs.
The provident fund represents an important source of small savings available to the
Government. Hence, the Income-tax Act, 1961 gives certain deductions on savings in
a provident fund account.
(i) Recognised Provident Fund (RPF)

Recognised provident fund means a provident fund recognised by the
Commissioner of Income-tax for the purposes of income-tax. It is governed by
Part A of Schedule IV to the Income-tax Act, 1961. This schedule contains various
rules regarding the following:
(a) Recognition of the fund
(b) Employee’s and employer’s contribution to the fund
(c) Treatment of accumulated balance etc.

A fund constituted under the Employees’ Provident Fund and Miscellaneous

Provisions Act, 1952 will also be a Recognised Provident Fund.
(ii) Unrecognised Provident Fund (URPF)
A fund not recognised by the Commissioner of Income-tax is Unrecognised
Provident Fund.
(iii) Statutory Provident Fund (SPF)
The SPF is governed by Provident Funds Act, 1925. It applies to employees of
government, railways, semi-government institutions, local bodies, universities
and all recognised educational institutions.
(iv) Public Provident Fund (PPF)
Public provident fund is operated under the Public Provident Fund Act, 1968. A
membership of the fund is open to every individual though it is ideally suited to
self-employed people. A salaried employee may also contribute to PPF in addition
to the fund operated by his employer. An individual may contribute to the fund
on his own behalf as also on behalf of a minor of whom he is the guardian.
For getting a deduction under section 80C, a member is required to contribute to
the PPF a minimum of ` 500 in a year. The maximum amount that may qualify for
deduction on this account is ` 1,50,000 as per PPF rules.
A member of PPF may deposit his contribution in as many installments in
multiples of ` 500 as is convenient to him. The sums contributed to PPF earn
interest at 8.0%. The amount of contribution may be paid at any of the offices or
branch offices of the State Bank of India or its subsidiaries and specified branches
of banks or any Post Office.
The tax treatment is given below:
I. During the Employment period
Particulars Recognized PF Unrecognized Statutory Public PF
PF PF
Employer’s Amount in Not taxable Fully exempt N.A. (as
Contribution excess of 12% of yearly there is only
salary is taxable assessee’s own
contribution)
Employee’s Eligible for Not eligible for Eligible for Eligible for
Contribution deduction u/s deduction deduction deduction u/s
80C u/s 80C 80C
Interest Amount in Not taxable Fully exempt Fully exempt
Credited excess of 9.5% yearly
p.a. is taxable
Note: Salary for this purpose means basic salary and dearness allowance - if provided

4.30 INCOME TAX LAW
in the terms of employment for retirement benefits and commission as a percentage

of turnover.
II. At the time of Retirement etc.
A. Recognised Provident Fund/Public Provident Fund/Statutory Provident
Fund
The payments received by an assessee from the following funds at the time
of retirement or otherwise, would be fully exempt from tax under sections
10(11) and (12):
Section 10(11) Section 10(12)
Provident fund (PF) to Public Provident Fund Accumulated balance
which Provident Fund payable to an
Act, 1925, applies employee participating
in a Recognized
Provident Fund (RPF)
Exemption of Accumulated balance of RPF, payable to an employee

Note:
If, after termination of his employment with one employer, the employee
obtains employment under another employer, then, only so much of the
accumulated balance in his provident fund account will be exempt which
is transferred to his individual account in a recognised provident fund
maintained by the new employer. In such a case, for exemption of payment
of accumulated balance by the new employer, the period of service with the
former employer shall also be taken into account for computing the period
of five years’ continuous service.
B. Unrecognised Provident Fund:
Amount received on the maturity of URPF
• Employee’s contribution is not taxable
• Interest on Employee’s contribution is taxable under ‘Income from
Other Sources’.
• Employer’s contribution and interest thereon is taxed as salary.
ILLUSTRATION 7
Mr. A retires from service on December 31, 2017, after 25 years of service. Following are
the particulars of his income/investments for the previous year 2017-18:
Particulars `
Basic pay @ ` 16,000 per month for 9 months 1,44,000
Dearness pay (50% forms part of the retirement benefits) ` 8,000 per 72,000
month for 9 months
Lumpsum payment received from the Unrecognized Provident Fund 6,00,000
Deposits in the PPF account 40,000
Out of the amount received from the unrecognized provident fund, the employer’s
contribution was ` 2,20,000 and the interest thereon ` 50,000. The employee’s contribution
was ` 2,70,000 and the interest thereon ` 60,000. What is the taxable portion of the
amount received from the unrecognized provident fund in the hands of Mr. A for the
assessment year 2018-19?
SOLUTION
Taxable portion of the amount received from the URPF in the hands of Mr. A for the A.Y.
2018-19 is computed hereunder:
Particulars `
Amount taxable under the head “Salaries”:
Employer’s share in the payment received from the URPF 2,20,000

4.32 INCOME TAX LAW
Particulars `
Interest on the employer’s share 50,000
Total 2,70,000
Amount taxable under the head “Income from Other Sources” :
Interest on the employee’s share 60,000
Total amount taxable from the amount received from the fund 3,30,000
Note: Since the employee is not eligible for deduction under section 80C for contribution
to URPF at the time of such contribution, the employee’s share received from the URPF
is not taxable at the time of withdrawal as this amount has already been taxed as his
salary income.
ILLUSTRATION 8
Will your answer be any different if the fund mentioned above was a recognised provident
fund?
SOLUTION
Since the fund is a recognised one, and the maturity is taking place after a service of
25 years, the entire amount received on the maturity of the RPF will be fully exempt
from tax.
ILLUSTRATION 9
Mr. B is working in XYZ Ltd. and has given the details of his income for the P.Y. 2017-18.
You are required to compute his gross salary from the details given below:
Basic Salary ` 10,000 p.m.
D.A. (50% is for retirement benefits) ` 8,000 p.m.
Commission as a percentage of turnover 0.1%
Turnover during the year ` 50,00,000
Bonus ` 40,000
Gratuity ` 25,000
His own contribution in the RPF ` 20,000
Employer’s contribution to RPF 20% of his basic salary
Interest accrued in the RPF @ 13% p.a. ` 13,000
SOLUTION
Computation of Gross Salary of Mr. B for the A.Y. 2018-19
Particulars ` `
Basic Salary [ ` 10,000 × 12] 1,20,000

Particulars ` `
Dearness Allowance [` 8,000 × 12] 96,000
Commission on turnover [0.1% × ` 50,00,000] 5,000
Bonus 40,000
Gratuity [Note 1] 25,000
Employee’s contribution to RPF [Note 2] -
Employers contribution to RPF [20% of ` 1,20,000] 24,000
Less : Exempt [Note 3] 20,760 3,240
Interest accrued in the RPF @ 13% p.a. 13,000

Less : Exempt @ 9.5% p.a. 9,500 3,500
Note 1: Gratuity received during service is fully taxable.
Note 2: Employee’s contribution to RPF is not taxable. It is eligible for deduction under
section 80C.
Note 3: Employers contribution in the RPF is exempt up to 12% of the salary.
i.e., 12% of [Basic Salary + Dearness Allowance forming part of retirement benefits +
Commission based on turnover] = 12% of [` 1,20,000 + (50% × ` 96,000) + ` 5,000] =
12% of ` 1,73,000 = ` 20,760
(8) The contribution made by the Central Government or any other employer in
the previous year to the account of an employee under a pension scheme referred
to in section 80CCD
National Pension scheme is a scheme approved by the Government for Indian citizen
aged between 18-60 years. Subscriber of the NPS account contributes some amount
in their account. In case of any employee, being a subscriber of the NPS account,
employer may also contribute into the employee’s account.
Employer’s contribution to NPS account would form part of salary of employees.
However, while computing total income of the employee-assessee, a deduction under
section 80CCD is allowed to the assessee in respect of the employer as well as employee
contribution under a pension scheme referred therein. (Deduction under section 80CCD
will be discussed in detail in Chapter 7 – “Deductions from Gross Total Income”)

4.34 INCOME TAX LAW
1.3.2 Profits in lieu of salary [Section 17(3)]

It includes the following:
(i) Compensation on account of termination of his employment
The amount of any compensation due to or received by an assessee from his employer
or former employer at or in connection with the termination of his employment.
(ii) Compensation on account of modification of the terms and conditions of
employment
The amount of any compensation due to or received by an assessee from his
employer or former employer at or in connection with the modification of the terms
and conditions of employment.
Usually, such compensation is treated as a capital receipt. However, by virtue of this
provision, the same is treated as a revenue receipt and is chargeable as salary.
Note: It is to be noted that merely because a payment is made by an employer to a
person who is his employee does not automatically fall within the scope of the above
provisions. The payment must be arising due to master-servant relationship between
the payer and the payee. If it is not on that account, but due to considerations totally
unconnected with employment, such payment is not profit in lieu of salary.
Example: A was an employee in a company in Pakistan. At the time of partition,
he migrated to India. He suffered loss of personal movable property in Pakistan due
to partition. He applied to his employer for compensating him for such loss. Cer-
tain payments were given to him as compensation. It was held that such payments
should not be taxed as ‘profit in lieu of salary’2.
(iii) Payment from provident fund or other fund

Any payment due to or received by an assessee from his employer or former employer
from a provident or other fund other than
- Gratuity [Section 10(10)]
- Pension [Section 10(10A)]
- Compensation received by a workman under Industrial Disputes Act, 1947 [Section
10(10B)]
- from provident fund or public provident fund [Section 10(11)]
- from recognized provident fund [Section 10(12)]
- from approved superannuation fund [Section 10(13)]
- any House Rent Allowance [Section 10(13A)],
2 Lachman Dass Vs. CIT [1980] 124 ITR 706 (Delhi)

to the extent to which it does not consist of employee’s contributions or interest on

such contributions.
Note: If any sum is paid to an employee at the time of maturity from an unrecognised
provident fund it is to be dealt with as follows:
(a) that part of the sum which represents the employer’s contribution to the fund and
interest thereon is taxable under salaries.
(b) that part of the sum which represents employee’s contribution and interest thereon
is not chargeable to tax since the same have already been taxed under the head
‘salaries’ and ‘other sources’ respectively.
(iv) Keyman Insurance policy
Any sum received by an assessee under a Keyman Insurance policy including the
sum allocated by way of bonus on such policy.
(v) Lumpsum Payment or otherwise
Any amount, whether in lumpsum or otherwise, due to the assessee or received by
him, from any person -
(a) before joining employment with that person, or
(b) after cessation of his employment with that person.
(1) Retrenchment compensation [Section 10(10B)]
The retrenchment compensation means the compensation paid under Industrial
Disputes Act, 1947 or under any Act, Rule, Order or Notification issued under any
law. It also includes compensation paid on transfer of employment under section 25F
or closing down of an undertaking under section 25FF of the Industrial Disputes Act,
1947.
It may be noted that compensation on account of termination and due to modification
in terms and conditions of employment would be taxable as “profits in lieu of salary”.
However, the retrenchment compensation would be exempt under section 10(10B),
subject to following limits.
(a) Amount calculated in accordance with the provisions of section 25F of the
Industrial Disputes Act, 1947
or
(b) An amount, not less than ` 5,00,000 as may be notified by the Central Government
in this behalf,
whichever is lower.

4.36 INCOME TAX LAW
Note: The above limits will not be applicable to cases where the compensation is paid
under any scheme approved by the Central Government for giving special protection
to workmen under certain circumstances.
ILLUSTRATION 10
Mr. Garg received retrenchment compensation of ` 10,00,000 after 30 years 4 months of
service. At the time of retrenchment, he was drawing basic salary ` 20,000 p.m.; dearness
allowance ` 5,000 p.m. Compute his taxable retrenchment compensation.
SOLUTION
Retrenchment compensation received ` 10,00,000
Less : Exemption under section10(10B) [See Note below] ` 4,32,692
Taxable retrenchment compensation ` 5,67,308
Note: Exemption is to the extent of least of the following:
(i) Compensation actually received = ` 10,00,000
(ii) Statutory Limit = ` 5,00,000
(iii) Amount calculated in accordance with provisions of the Industrial Disputes Act,
1947
= ` 4,32,692
(2) Voluntary Retirement Receipts [Section 10(10C)]
Lumpsum payment or otherwise received by an employee at the time of voluntary
retirement would be taxable as “profits in lieu of salary”. However, it would be exempt
under section 10(10C), subject to the following conditions:
Eligible Undertakings - The employee of the following undertakings are eligible for
exemption under this clause:
(i) Public sector company
(ii) Any other company
(iii) An authority established under a Central/State or Provincial Act
(iv) A local authority
(v) A co-operative society
(vi) An University established or incorporated under a Central/State or Provincial
Act and an Institution declared to be an University by the University Grants
Commission.
(vii) An Indian Institute of Technology
(viii) Such Institute of Management as the Central Government may, by notification in
the Official Gazette, specify in this behalf

(ix) Any State Government

(x) The Central Government
(xi) An institution, having importance throughout India or in any state or states, as
the Central Government may specify by notification in the Official Gazette.
Limit : The maximum limit of exemption should not exceed ` 5 lakh.
Such compensation should be at the time of his voluntary retirement or termination
of his service, in accordance with any scheme or schemes of voluntary retirement or, in
the case of public sector company, a scheme of voluntary separation. The exemption
will be available even if such compensation is received in installments.
Guidelines:
The schemes should be framed in accordance with such guidelines, as may be
prescribed and should include the criteria of economic viability.
Rule 2BA prescribes the following guidelines for the purposes of the above clause:
1. It applies to an employee who has completed 10 years of service or completed
40 years of age.
However, this requirement is not applicable in case of an employee of a public
sector company under the scheme of voluntary separation framed by the
company.
2. It applies to all employees by whatever name called, including workers and
executives of the company or the authority except directors of a company or a
cooperative society.
3. The scheme of voluntary retirement or separation must have been drawn to result
in overall reduction in the existing strength of the employees.
4. The vacancy caused by the voluntary retirement or separation must not
be filled up.
5. The retiring employee of a company shall not be employed in another company
or concern belonging to the same management.
6. The amount receivable on account of voluntary retirement or separation of the
employee must not exceed
- the amount equivalent to three months’ salary for each completed year
of service or
- salary at the time of retirement multiplied by the balance months of service
left before the date of his retirement or superannuation.
Note –
1. Where any relief has been allowed to any assessee under section 89 for any
assessment year in respect of any amount received or receivable on his voluntary
retirement or termination of service or voluntary separation, no exemption under

4.38 INCOME TAX LAW
section 10(10C) shall be allowed to him in relation to that assessment year or any
other assessment year.
2. Salary for this purpose means basic salary and dearness allowance, if provided
in the terms of employment for retirement benefits, forming part of salary and
commission which is expressed as a fixed percentage of turnover
ILLUSTRATION 11
Mr. Dutta received voluntary retirement compensation of ` 7,00,000 after 30 years 4
months of service. He still has 6 years of service left. At the time of voluntary retirement,
he was drawing basic salary ` 20,000 p.m.; Dearness allowance (which forms part of pay)
` 5,000 p.m. Compute his taxable voluntary retirement compensation, assuming that he
does not claim any relief under section 89.
SOLUTION
Voluntary retirement compensation received ` 7,00,000
Less: Exemption under section 10(10C) [See Note below] ` 5,00,000
Taxable voluntary retirement compensation ` 2,00,000
Note: Exemption is to the extent of least of the following:
(i) Compensation actually received = ` 7,00,000
(ii) Statutory limit = ` 5,00,000
(iii) Last drawn salary × 3 × completed years of service
= (` 20,000 + ` 5,000) × 3 × 30 years = ` 22,50,000
(iv) Last drawn salary × remaining months of service
= (` 20,000 + ` 5,000) × 6 × 12 months = ` 18,00,000
1.3.3 Perquisites
The term ‘perquisite’ indicates some extra benefit in addition to the amount that
may be legally due by way of contract for services rendered. In modern times, the
salary package of an employee normally includes monetary salary and perquisite like
housing, car etc.
• Perquisite may be provided in cash or in kind.
• Reimbursement of expenses incurred in the official discharge of duties is not a
perquisite.
• Perquisite may arise in the course of employment or in the course of profession. If
it arises from a relationship of employer-employee, then the value of the perquisite
is taxable as salary. However, if it arises during the course of profession, the value
of such perquisite is chargeable as profits and gains of business or profession.
• Perquisite will become taxable only if it has a legal origin. An unauthorised
advantage taken by an employee without his employer’s sanction cannot be
considered as a perquisite under the Act.
Example:
Suppose Mr. A, an employee, is given a house by his employer. On 31.3.2018,
he is terminated from service. But he continues to occupy the house without
the permission of the employer for six more months after which he is evicted
by the employer. The question arises whether the value of the benefit enjoyed
by him during the six months period can be considered as a perquisite and
be charged to salary. It cannot be done since the relationship of employer-
employee ceased to exist after 31.3.2018. However, the definition of income
is wide enough to bring the value of the benefit enjoyed by Mr. A to tax as
“income from other sources”.
(1) Definition of “Perquisite”

The term “perquisite” is defined under section 17(2). The definition of perquisite is an
inclusive one. Based on the definition, perquisites can be classified in following three
ways:
(A) Perquisites taxable in the case of all employees

The following perquisites are chargeable to tax in case of all employees:
Rent Free Value of rent-free accommodation provided to the assessee by
Accommodation his employer [Section 17(2)(i)]. [Refer discussion on valuation
of perquisite)
Exception: Rent-free official residence provided to a Judge of a High Court or to a Judge
of the Supreme Court is not taxable. Similarly, rent-free furnished house provided to an
Officer of Parliament, is not taxable.
Concession in rent Value of concession in rent in respect of accommodation
provided to the assessee by his employer [Section 17(2)(ii)].
Payment by the Amount paid by an employer in respect of any obligation
employer in respect which otherwise would have been payable by the employee
of an obligation of [Section 17(2)(iv)].
employee
For example, if a domestic servant is engaged by an employee and the employer
reimburses the salary paid to the servant, it becomes an obligation which the employee
would have discharged even if the employer did not reimburse the same. This perquisite
will be covered by section 17(2)(iv) and will be taxable in the hands of all employees.
4.40 INCOME TAX LAW
Amount payable Amount payable by an employer directly or indirectly to

by an employer effect an assurance on the life of the assessee or to effect a
directly or contract for an annuity, other than payment made to RPF or
indirectly to effect approved superannuation fund or deposit-linked insurance
an assurance on fund established under the Coal Mines Provident Fund or
the life of the Employees’ Provident Fund Act. [Section 17(2)(v)]
assessee However, there are schemes like group annuity scheme,
employees state insurance scheme and fidelity insurance
scheme, under which insurance premium is paid by employer
on behalf of the employees. Such payments are not regarded
as perquisite in view of the fact that the employees have only
an expectancy of the benefit in such schemes.
Specified security The value of any specified security or sweat equity shares
or sweat equity allotted or transferred, directly or indirectly, by the employer
shares allotted or or former employer, free of cost or at concessional rate to the
transferred, by the assessee. [Section 17(2)(vi)]
employer
Amount of any The amount of any contribution to an approved superannuation
contribution to fund by the employer in respect of the assessee, to the extent
an approved it exceeds ` 1,50,000. [Section 17(2)(vii)]
superannuation
fund
Any other fringe The value of any other fringe benefit or amenity as may be
benefit or amenity prescribed by the CBDT. [Section 17(2)(viii)]
Exemption in respect of Payment from superannuation funds [Section 10(13)]
Any payment received by any employee from an approved superannuation fund shall
be entirely excluded from his total income if the payment is made
(a) on the death of a beneficiary;
(b) to an employee in lieu or in commutation of an annuity on his retirement at or
after a specified age or on his becoming incapacitated prior to such retirement;
or
(c) by way of refund of contribution on the death of a beneficiary; or
(d) by way of contribution to an employee on his leaving the service in connection
with which the fund is established otherwise than by retirement at or after a
specified age or his becoming incapacitated prior to such retirement, to the
extent the payment made does not exceed the contribution made prior to 1-4-
1962 and the interest thereon.

(e) by way of transfer to the account of the employee under a pension scheme
referred to in section 80CCD, which is notified by the Central Government.
(B) Perquisites exempt from tax in all cases
The following perquisites are exempt from tax in the hands of all employees.
Telephone Telephone provided by an employer to an employee at his
residence
Transport Facility Transport facility provided by an employer engaged in
the business of carrying of passengers or goods to his
employees either free of charge or at concessional rate;
Privilege passes and Privilege passes and privilege ticket orders granted by
privilege ticket Indian Railways to its employees;
Perquisites allowed Perquisites allowed outside India by the Government to a
outside India by the citizen of India for rendering services outside India;
Government
Employer’s Employer’s contribution to staff group insurance scheme;
contribution to staff
group insurance
scheme;
Annual premium Payment of annual premium by employer on personal
by employer on accident policy effected by him on the life of the employee;
personal accident
policy
Refreshment Refreshment provided to all employees during working
hours in office premises;
Subsidized lunch Subsidized lunch or dinner provided to an employee;
Recreational Recreational facilities, including club facilities, extended
facilities to employees in general i.e., not restricted to a few select
employees;
Amount spent Amount spent by the employer on training of employees
on training of or amount paid for refresher management course including
employees expenses on boarding and lodging;
Sum payable by Sum payable by an employer to a RPF or an approved
employer to a RPF superannuation fund or deposit-linked insurance fund
or an approved established under the Coal Mines Provident Fund or the
superannuation Employees’ Provident Fund Act;
fund

4.42 INCOME TAX LAW
Leave travel Leave travel concession, subject to the conditions specified

concession under section 10 (discussed below)
Medical facilities Medical facilities subject to certain prescribed limits;
Rent-free official Rent-free official residence provided to a Judge of a High
residence Court or the Supreme Court;
Rent-free furnished Rent-free furnished residence including maintenance
residence provided to an Officer of Parliament, Union Minister and a
Leader of Opposition in Parliament;
Conveyance facility Conveyance facility provided to High Court Judges under
section 22B of the High Court Judges (Conditions of Service)
Act, 1954 and Supreme Court Judges under section 23A of
the Supreme Court Judges (Conditions of Service) Act, 1958.
Exemption in respect of Leave travel concession [Section 10(5)]
(i) This clause exempts the leave travel concession (LTC) received by employees from
their employers for proceeding to any place in India,
(a) either on leave or
(b) after retirement from service or
(c) after termination of his service.
(ii) The benefit is available to individuals - citizens as well as non-citizens - in respect
of travel concession or assistance for himself or herself and for his/her family- i.e.,
spouse and children of the individual and parents, brothers and sisters of the
individual or any of them wholly or mainly dependent on the individual.
(iii) Limit of exemption - The exemption in all cases will be limited to the amount
actually spent subject to such conditions as specified in Rule 2B regarding the
ceiling on the number of journeys for the place of destination.
Under Rule 2B, exemption will be available in respect of 2 journeys performed
in a block of 4 calendar years commencing from the calendar year 1986. Where
such travel concession or assistance is not availed by the individual during any
block of 4 calendar years, one such unavailed LTC will be carried forward to
the immediately succeeding block of 4 calendar years and will be eligible for
exemption.
Example:
An employee does not avail any LTC for the block 2010-13. He avails it during
2014. He is allowed to carry forward maximum one such holiday to be used
in the succeeding block. Therefore, he will be eligible for exemption and two
more journeys can be further availed.
(iv) Monetary limits - Where the journey is performed on or after the 1.10.1997, the
amount exempted under section 10(5) in respect of the value of LTC shall be the
amount actually incurred on such travel subject to the following conditions:
(1) where it is performed by air, an amount not exceeding the air economy fare
of the National Carrier by the shortest route to the place of destination;
(2) where places of origin of journey and destination are connected by rail and
the journey is performed by any mode of transport other than by air an
amount not exceeding the air-conditioned first class rail fare by the shortest
route to the place of destination; and
(3) where the places of origin of journey and destination or part thereof are not
connected by rail, the amount eligible for exemption shall be,—
(A) where a recognised public transport system exists, an amount not
exceeding the 1st class or deluxe class fare, as the case may be, on
such transport by the shortest route to the place of destination ; and
(B) where no recognised public transport system exists, an amount
equivalent to the air-conditioned first class rail fare, for the distance of
the journey by the shortest route, as if the journey had been performed
by rail.
Note: The exemption referred to shall not be available to more than two surviving
children of an individual after 1.10.1998. This restrictive sub-rule shall not apply in
respect of children born before 1.10.1998 and also in case of multiple births after one
child.
ILLUSTRATION 12
Mr. D went on a holiday on 25.12.2017 to Delhi with his wife and three children (one son
– age 5 years; twin daughters – age 2 years). They went by flight (economy class) and the
total cost of tickets reimbursed by his employer was ` 60,000 ( ` 45,000 for adults and
` 15,000 for the three minor children). Compute the amount of LTC exempt.
SOLUTION
Since the son’s age is more than the twin daughters, Mr. D can avail exemption for all
his three children. The restriction of two children is not applicable to multiple births
after one child. The holiday being in India and the journey being performed by air
(economy class), the entire reimbursement met by the employer is fully exempt.
ILLUSTRATION 13
In the above illustration 12, will there be any difference if among his three children the
twins were 5 years old and the son 3 years old? Discuss.
SOLUTION
Since the twins’ age is more than the son, Mr. D cannot avail for exemption for all his
three children. LTC exemption can be availed in respect of only two children. Taxable

4.44 INCOME TAX LAW
LTC exempt is only ` 55,000 (i.e. ` 60,000 – ` 5,000)

(C) Perquisites taxable only in the hands of specified employees [Section 17(2)
(iii)]
The value of any benefit or amenity granted or provided free of cost or at concessional
rate which have not been included in 1 & 2 above will be taxable in the hands of
specified employees:
Specified employees are:
(i) Director employee: An employee of a company who is also a director is a
specified employee. It is immaterial whether he is a full-time director or part-time
director. It also does not matter whether he is a nominee of the management,
workers, financial institutions or the Government. It is also not material whether
or not he is a director throughout the previous year.
(ii) An employee who has substantial interest in the company: An employee of a
company who has substantial interest in that company is a specified employee. A
person has a substantial interest in a company if he is a beneficial owner of equity
shares carrying 20% or more of the voting power in the company.
Beneficial and legal ownership: In order to determine whether a person has a
substantial interest in a company, it is the beneficial ownership of equity shares
carrying 20% or more of the voting power that is relevant rather than the legal
ownership.
Example:
A, Karta of a HUF, is a registered shareholder of Bright Ltd. The amount for
purchasing the shares is financed by the HUF. The dividend is also received by
the HUF. Supposing further that A is the director in Bright Ltd., the question
arises whether he is a specified employee.
In this case, he cannot be called a specified person since he has no beneficial
interest in the shares registered in his name. It is only for the purpose of
satisfying the statutory requirements that the shares are registered in the name
of A. All the benefits arising from the shareholding goes to the HUF. Conversely,
it may be noted that an employee who is not a registered shareholder will be
considered as a specified employee if he has beneficial interest in 20% or more
of the equity shares in the company.
(iii) Employee drawing in excess of ` 50,000: An employee other than an employee
described in (i) & (ii) above, whose income chargeable under the head ‘salaries’
exceeds ` 50,000 is a specified employee. The above salary is to be considered

exclusive of the value of all benefits or amenities not provided by way of monetary
payments.
In other words, for computing the limit of ` 50,000, the following items have to
be excluded or deducted:
(a) all non-monetary benefits;
(b) monetary benefits which are exempt under section 10. This is because
the exemptions provided under section 10 are excluded completely from
salaries.
For example, HRA or education allowance or hostel allowance are not
to be included in salary to the extent to which they are exempt under
section 10.
(c) Deduction for entertainment allowance [under section 16(ii)] and
deduction toward professional tax [under section 16(iii)] are also to be
excluded.
If an employee is employed with more than one employer, the aggregate of the
salary received from all employers is to be taken into account in determining
the above ceiling limit of ` 50,000, i.e., Salary for this purpose= Basic Salary +
Dearness Allowance + Commission, whether payable monthly or turnover based
+ Bonus + Fees + Any other taxable payment + Any taxable allowances + Any
other monetary benefits – Deductions under section 16]
(2) Valuation of Perquisites
The Income-tax Rules, 1962 contain the provisions for valuation of perquisites. It is
important to note that only those perquisites which the employee actually enjoys have
to be valued and taxed in his hand.
Examples:
Suppose a company offers a housing accommodation rent-free to an employee but
the latter declines to accept it, then the value of such accommodation obviously
cannot be evaluated and taxed in the hands of the employees.
For the purpose of computing the income chargeable under the head “Salaries”, the
value of perquisites provided by the employer directly or indirectly to the employee or
to any member of his household by reason of his employment shall be determined in
accordance with Rule 3.
(A) Valuation of residential accommodation [Sub-rule (1) of Rule 3]
The value of residential accommodation provided by the employer during the
previous year shall be determined in the following manner –

4.46 INCOME TAX LAW
Sl. Circumstances In case of In case of furnished

No. unfurnished accommodation
accommodation
(1) (2) (3) (4)
1. Where the • License fee • The value of perquisite as
accommodation determined determined under column
is provided by the Central (3) and
by the Central Government increased by
Government or any State • 10% per annum of
or any State Government the cost of furniture
Government to in respect of (including television
the employees accommodation sets, radio sets,
either holding in accordance refrigerators, other
office or post in with the rules household appliances,
connection with framed by such air-conditioning plant or
the affairs of the Government equipment).
Union or of such as reduced by If such furniture is hired
State. • the rent actually from a third party,
paid by the • the actual hire charges
employee. payable for the same
as reduced by
• any charges paid or
payable for the same by
the employee during the
previous year should be
added to the value of the
perquisite determined
under column (3).
2. Where the
accommodation is
provided by any
other employer
(a) where the (i) 15% of salary • The value of perquisite
accommodation in cities having as determined under
is owned by the population column (3) and
employer exceeding 25
lakhs as per 2001
census;


accommodation
(1) (2) (3) (4)
(ii) 10% of salary increased by
in cities having • 10% per annum of
population the cost of furniture
exceeding 10 (including television
lakhs but not sets, refrigerators, other
exceeding 25 household appliances,
lakhs as per 2001 air-conditioning plant
census; or equipment or other
(iii) 7.5% of salary in similar appliances or
other areas, gadgets).
in respect of the If such furniture is hired
period during from a third party,
which the said • The actual hire charges
accommodation payable for the same
was occupied by the as reduced by
employee during • any charges paid or
the previous year as payable for the same by
reduced by the rent, the employee during the
if any, actually paid previous year, should be
by the employee. added to the value of
under column (3).
(b) where the • Actual amount of • The value of perquisite as
accommodation lease rental paid determined under column
is taken on or payable by the (3) and
lease or rent by employer or increased by
the employer. • 15% of salary • 10% per annum of
whichever is lower, the cost of furniture
as reduced by (including television
• the rent, if any, sets, radio sets,
actually paid by refrigerators, other
the employee. household appliances,
air-conditioning plant
or equipment or other
similar appliances or
gadgets).

4.48 INCOME TAX LAW

accommodation
(1) (2) (3) (4)
If such furniture is hired
from a third party,
• the actual hire charges
payable for the same
as reduced by
• any charges paid or
payable for the same by
the employee during the
previous year should be
added to the value of
under column (3).
3. Where the Not applicable • 24% of salary paid or
accommodation is payable for the previous
provided by any year or
employer, whether • the actual charges paid
Government or payable to such hotel,
or any other whichever is lower, for
employer, in a the period during which
hotel. such accommodation is
provided
• as reduced by the
rent, if any, actually
paid or payable by the
employee.
However, where the
employee is provided
such accommodation for
a period not exceeding in
aggregate fifteen days on
his transfer from one place
to another, there would be
no perquisite.
Notes:
(1) If an employee is provided with accommodation, on account of his transfer
from one place to another, at the new place of posting while retaining the
accommodation at the other place, the value of perquisite shall be determined
with reference to only one such accommodation which has the lower perquisite
value, as calculated above, for a period not exceeding 90 days and thereafter, the
value of perquisite shall be charged for both such accommodations.
(2) Any accommodation provided to an employee working at a mining site or an
on-shore oil exploration site or a project execution site, or a dam site or a power
generation site or an off-shore site would not be treated as a perquisite, provided
it satisfies either of the following conditions -
(i) the accommodation is of temporary nature, has plinth area not exceeding
800 square feet and is located not less than eight kilometers away from the
local limits of any municipality or a cantonment board; or
(ii) the accommodation is located in a remote area i.e., an area that is located
at least 40 kms away from a town having a population not exceeding 20,000
based on latest published all-India census.
(3) Where the accommodation is provided by the Central Government or any State
Government to an employee who is serving on deputation with any body or
undertaking under the control of such Government,-
(i) the employer of such an employee shall be deemed to be that body or
undertaking where the employee is serving on deputation; and
(ii) the value of perquisite of such an accommodation shall be the amount
calculated in accordance with Sl. No.2(a) of the above table, as if the
accommodation is owned by the employer.
(4) “Accommodation” includes a house, flat, farm house or part thereof, or
accommodation in a hotel, motel, service apartment, guest house, caravan,
mobile home, ship or other floating structure.
(5) “Hotel” includes licensed accommodation in the nature of motel, service
apartment or guest house.
(B) Value of any concession in the matter of rent respecting any accommodation
provided to the assessee by the employer [Section 17(2)(ii)]
(i) In case of unfurnished accommodation provided to employees other than
Government employees –
• If accommodation owned by the employer: The difference between
the specified rate and the amount of rent recoverable/recovered from the
employee would be deemed to be the concession in the matter of rent.
• If accommodation taken on lease or rent by the employer: The difference
between the actual lease rent or 15% of salary, whichever is lower, and rent
recovered/recoverable from the employee would be deemed to be the
concession in the matter of rent.
4.50 INCOME TAX LAW
(1) (2)
Type of accommodation Deemed concession in the
matter of rent
Accommodation owned by the Specified rate minus rent
employer recoverable from the employee.
In cities having a population 15% of salary minus rent
exceeding 25 lakh recoverable from the employee.
In cities having a population 10% of salary minus rent
exceeding 10 lakh but not recoverable from the employee.
exceeding 25 lakh
In other cities 7½% of salary minus rent
recoverable from employee.
Accommodation taken on lease Rent paid by the employer or
by the employer 15% of salary, whichever is lower,
minus rent recoverable from the
employee.
(ii) In case of furnished accommodation provided to employees other than
Government employees –
The difference between hire charges paid or 10% p.a. of cost of furniture, as the
case may be, and the charges paid or payable by the employee would be added
to the value determined in column (2) above for determining whether there is a
concession in the matter of rent.
(iii) In case of Government employees-
The excess of licence fees determined by the employer as increased by hire
charges paid or 10% p.a. of cost of furniture, as the case may be, over and above
the rent recovered/recoverable from the employee and the charges paid or
payable for furniture by the employee would be deemed to be the concession in
the matter of rent.
(iv) In case the accommodation is provided by any employer, whether
Government or any other employer, in a hotel-
The difference between the actual charges paid to hotel or 24% of salary,
whichever is lower, and rent recovered/recoverable from the employee would be
deemed to be the concession in the matter of rent.
However, where the employee is provided such accommodation for a period not
exceeding in aggregate fifteen days on his transfer from one place to another,
there would be no perquisite.
Note – Once there is a deemed concession, the provisions of Rule 3(1) discussed
above would be applicable in computing the taxable perquisite.

Meaning of Salary
“Salary” includes pay, allowances, bonus or commission payable monthly or otherwise
or any monetary payment, by whatever name called, from one or more employers,
as the case may be. However, it does not include the following, namely–
(1) dearness allowance or dearness pay unless it enters into the computation of
superannuation or retirement benefits of the employee concerned;
(2) employer’s contribution to the provident fund account of the employee;
(3) allowances which are exempted from the payment of tax;
(4) value of the perquisites specified in section 17(2);
(5) any payment or expenditure specifically excluded under the proviso to section
17(2) i.e., medical expenditure/payment of medical insurance premium specified
therein.
ILLUSTRATION 14
Mr. C is a Finance Manager in ABC Ltd. The company has provided him with rent-free
unfurnished accommodation in Mumbai. He gives you the following particulars:
Basic salary ` 6,000 p.m.
Dearness Allowance ` 2,000 p.m. (30% is for retirement benefits)
Bonus ` 1,500 p.m.
Even though the company allotted the house to him on 1.4.2017, he occupied the same
only from 1.11.2017. Calculate the taxable value of the perquisite for A.Y.2018-19.
SOLUTION
Value of the rent free unfurnished accommodation
= 15% of salary for the relevant period
= 15% of [(` 6000 × 5) + (` 2,000 × 30% × 5) + (` 1,500 × 5)] [See Note below]
= 15% of ` 40,500 = ` 6,075.
Note: Since, Mr. C occupies the house only from 1.11.2017, we have to include the salary
due to him only in respect of months during which he has occupied the accommodation.
Hence salary for 5 months (i.e. from 1.11.2017 to 31.03.2018) will be considered.
ILLUSTRATION 15
Using the data given in the previous illustration 14, compute the value of the perquisite
if Mr. C is required to pay a rent of ` 1,000 p.m. to the company, for the use of this
accommodation.
SOLUTION
First of all, we have to see whether there is a concession in the matter of rent. In the case
of accommodation owned by the employer in cities having a population exceeding 25
4.52 INCOME TAX LAW
lakh, there would be deemed to be a concession in the matter of rent if 15% of salary
exceeds rent recoverable from the employee.
In this case, 15% of salary would be ` 6,075 (i.e. 15% of ` 40,500). The rent paid by the
employee is ` 5,000 (i.e., ` 1,000 x 5). Since 15% of salary exceeds the rent recovered
from the employee, there is a deemed concession in the matter of rent. Once there is
a deemed concession, the provisions of Rule 3(1) would be applicable in computing
the taxable perquisite.
Value of the rent free unfurnished accommodation = ` 6,075
Less: Rent paid by the employee (` 1,000 × 5) = ` 5,000
Perquisite value of unfurnished accommodation
given at concessional rent = ` 1,075
ILLUSTRATION 16
Using the data given in illustration 14, compute the value of the perquisite if ABC Ltd. has
taken this accommodation on a lease rent of ` 1,200 p.m. and Mr. C is required to pay a
rent of ` 1,000 p.m. to the company, for the use of this accommodation.
SOLUTION
Here again, we have to see whether there is a concession in the matter of rent. In the
case of accommodation taken on lease by the employer, there would be deemed to
be a concession in the matter of rent if the rent paid by the employer or 15% of salary,
whichever is lower, exceeds rent recoverable from the employee.
In this case, 15% of salary is ` 6,075 (i.e. 15% of ` 40,500). Rent paid by the employer is
` 6,000 (i.e. ` 1,200 x 5). The lower of the two is ` 6,000, which exceeds the rent paid by
the employee i.e. ` 5,000 (` 1,000 x 5). Therefore, there is a deemed concession in the
matter of rent. Once there is a deemed concession, the provisions of Rule 3(1) would
be applicable in computing the taxable perquisite.
Value of the rent free unfurnished accommodation [Note] = ` 6,000
Value of unfurnished accommodation given at concessional rent = ` 1,000
Note : Value of the rent free unfurnished accommodation is lower of
(i) Lease rent paid by the company for relevant period= ` 1,200 × 5 = ` 6,000
(ii) 15% of salary for the relevant period (computed earlier) = ` 6,075
ILLUSTRATION 17
Using the data given in illustration 14, compute the value of the perquisite if ABC Ltd.
has provided a television (WDV ` 10,000; Cost ` 25,000) and two air conditioners. The
rent paid by the company for the air conditioners is ` 400 p.m. each. The television was
provided on 1.1.2018. However, Mr. C is required to pay a rent of ` 1,000 p.m. to the
company, for the use of this furnished accommodation.
SOLUTION
Here again, we have to see whether there is a concession in the matter of rent. In
the case of accommodation owned by the employer in a city having a population
exceeding ` 25 lakh, there would be deemed to be a concession in the matter of rent
if 15% of salary exceeds rent recoverable from the employee. In case of furnished
accommodation, the excess of hire charges paid or 10% p.a. of the cost of furniture, as
the case may be, over and above the charges paid or payable by the employee has to
be added to the value arrived at above to determine whether there is a concession in
the matter of rent.
In this case, 15% of salary is ` 6,075 (i.e. 15% of ` 40,500). The rent paid by the employee
is ` 5,000 (i.e. ` 1,000 x 5). The value of furniture of ` 4,625 (see Note below) is to be
added to 15% of salary. The deemed concession in the matter of rent is ` 6,075 + ` 4,625-
` 5,000 = ` 5,700. Once there is a deemed concession, the provisions of Rule 3(1)
would be applicable in computing the taxable perquisite.
Value of the rent free unfurnished accommodation(computed earlier) = ` 6,075
Add: Value of furniture provided by the employer [Note] = ` 4,625
Value of rent free furnished accommodation = ` 10,700
Value of furnished accommodation given at concessional rent = ` 5,700
Note : Value of the furniture provided = (` 400 p.m. × 2 × 5 months) + (` 25,000 × 10%
p.a. for 3 months) =` 4,000 + ` 625 = ` 4,625
ILLUSTRATION 18
Using the data given in illustration 17 above, compute the value of the perquisite if Mr.
C is a government employee. The licence fees determined by the Government for this
accommodation was ` 700 p.m.
SOLUTION
In the case of Government employees, the excess of licence fees determined by
the employer as increased by the value of furniture and fixture over and above the
rent recovered/ recoverable from the employee and the charges paid or payable for
furniture by the employee would be deemed to be the concession in the matter of rent.
Therefore, the deemed concession in the matter of rent is ` 3,125 [i.e. ` 3,500 (licence
fees: ` 700 x 5) + ` 4,625 (Value of furniture) – ` 5,000 (` 1,000 × 5)]. Once there is a
deemed concession, the provisions of Rule 3(1) would be applicable in computing the
taxable perquisite.
Value of the rent free unfurnished accommodation (` 700 × 5) = ` 3,500
Add: Value of furniture provided by the employer (computed earlier) = ` 4,625
Value of rent free furnished accommodation = ` 8,125

4.54 INCOME TAX LAW

Perquisite value of furnished accommodation
given at concessional rent = ` 3,125
(C) Motor Car [Sub-rule (2) of Rule 3]
The value of perquisite by way of use of motor car to an employee by an employer shall
be determined in the following manner -
VALUE OF PERQUISITE PER CALENDAR MONTH
Sl. Circumstances Where cubic capacity of Where cubic capacity
No. engine does not exceed of engine exceeds 1.6
1.6 litres litres
(1) (2) (3) (4)
(1) Where the motor
car is owned
or hired by the
employer and –
(a) is used wholly Not a perquisite, provided Not a perquisite,
and exclusively in the documents specified provided the
the performance in Note (2) below the table documents specified
of his official are maintained by the in Note (2) below the
duties employer. table are maintained
by the employer.
(b) is used Actual amount of Actual amount of
exclusively for expenditure incurred expenditure incurred
the private by the employer on the by the employer
or personal running and maintenance on the running and
purposes of the of motor car during the maintenance of motor
employee or any relevant previous year car during the relevant
member of his including remuneration, if previous year including
household and any, paid by the employer remuneration, if any,
the running and to the chauffeur as paid by the employer
maintenance increased by the amount to the chauffeur as
expenses are met representing normal wear increased by the
or reimbursed by and tear of the motor car amount representing
the employer; and as reduced by any normal wear and tear
amount charged from the of the motor car and
employee for such use. as reduced by any
amount charged from
the employee for such
use.

1.6 litres litres
(1) (2) (3) (4)
(c) is used partly in
the performance
of duties and
partly for private
or personal
purposes of
his own or any
member of his ` 1,800 (plus ` 900, if ` 2,400 (plus ` 900,
household and- chauffeur is also provided if chauffeur is also
(i) the expenses on to run the motor car) provided to run the
maintenance and motor car)
running are met
or reimbursed by
the employer
(ii) the expenses ` 600 (plus ` 900, if ` 900 (plus ` 900,
on running and chauffeur is also provided if chauffeur is also
maintenance by the employer to run provided by the
for private or the motor car) employer to run the
personal use are motor car)
fully met by the
assessee.
(2) Where the
employee owns
a motor car but
the actual running
and maintenance
charges (including
remuneration of
the chauffeur, if
any) are met or
reimbursed to him
by the employer
and –

4.56 INCOME TAX LAW

1.6 litres litres
(1) (2) (3) (4)
(a) such Not a perquisite, Not a perquisite,
reimbursement is provided the documents provided the
for the use of the specified in Note (2) documents specified
vehicle wholly below the table are in Note (2) below the
and exclusively maintained by the table are maintained
for official employer. by the employer.
purposes
(b) such The actual amount of The actual amount of
reimbursement is expenditure incurred by expenditure incurred
for the use of the the employer as reduced by the employer
vehicle partly for by the amount specified as reduced by the
official purposes in Sl. No. (1)(c)(i) above amount specified in
and partly for (Also see note (2) below Sl. No. (1)(c)(i) above
personal or this table). (Also see note (2)
private purposes below this table).
of the employee
or any member
of his household.
(3) Where the
employee owns any
other automotive
conveyance but
the actual running
and maintenance
charges are met or
reimbursed to him
by the employer
and Not a perquisite, provided Not applicable.
(a) such the documents specified
reimbursement is in the note (2) below the
for the use of the table are maintained by
vehicle wholly the employer.
and exclusively
for official
purposes


1.6 litres litres
(1) (2) (3) (4)
(b) such The actual amount of
reimbursement expenditure incurred by
is for the use of the employer as reduced
vehicle partly for by the amount of ` 900.
official purposes (Also see note (2) below
and partly for the table)
personal or
private purposes
of the employee
Notes:
(1) Where one or more motor-cars are owned or hired by the employer and the
employee or any member of his household are allowed the use of such motor-
car or all of any of such motor-cars (otherwise than wholly and exclusively in the
performance of his duties), the value of perquisite shall be the amount calculated
in respect of one car as if the employee had been provided one motor-car for
use partly in the performance of his duties and partly for his private or personal
purposes and the amount calculated in respect of the other car or cars as if he
had been provided with such car or cars exclusively for his private or personal
purposes.
(2) Where the employer or the employee claims that the motor-car is used wholly
and exclusively in the performance of official duty or that the actual expenses
on the running and maintenance of the motor-car owned by the employee for
official purposes is more than the amounts deductible in Sl. No. 2(ii) or 3(ii) of the
above table, he may claim a higher amount attributable to such official use and
the value of perquisite in such a case shall be the actual amount of charges met
or reimbursed by the employer as reduced by such higher amount attributable to
official use of the vehicle provided that the following conditions are fulfilled :-
(a) the employer has maintained complete details of journey undertaken for
official purpose which may include date of journey, destination, mileage,
and the amount of expenditure incurred thereon;
(b) the employer gives a certificate to the effect that the expenditure was
incurred wholly and exclusively for the performance of official duties.
(3) For computing the perquisite value of motor car, the normal wear and tear of a
motor-car shall be taken at 10% per annum of the actual cost of the motor-car or
cars.
4.58 INCOME TAX LAW
(D) Valuation of benefit of provision of domestic servants [Sub-rule (3) of Rule

3]
(i) The value of benefit to the employee or any member of his household resulting
from the provision by the employer of the services of a sweeper, a gardener, a
watchman or a personal attendant, shall be the actual cost to the employer.
(ii) The actual cost in such a case shall be the total amount of salary paid or payable
by the employer or any other person on his behalf for such services as reduced
by any amount paid by the employee for such services.
ILLUSTRATION 19
Mr. X and Mr. Y are working for M/s. Gama Ltd. As per salary fixation norms, the following
perquisites were offered:
(i) For Mr. X, who engaged a domestic servant for ` 500 per month, his employer
reimbursed the entire salary paid to the domestic servant i.e. ` 500 per month.
(ii) For Mr. Y, he was provided with a domestic servant @ ` 500 per month as part of
remuneration package.
You are required to comment on the taxability of the above in the hands of Mr. X and Mr.
Y, who are not specified employees.
SOLUTION
In the case of Mr. X, it becomes an obligation which the employee would have
discharged even if the employer did not reimburse the same. Hence, the perquisite
will be covered under section 17(2)(iv) and will be taxable in the hands of Mr. X. This is
taxable in the case of all employees.
In the case of Mr. Y, it cannot be considered as an obligation which the employee would
meet. The employee might choose not to have a domestic servant. This is taxable only
in the case of specified employees covered by section 17(2)(iii). Hence, there is no
perquisite element in the hands of Mr. Y.
(E) Valuation of gas, electricity or water supplied by employer [Sub-rule (4) of
Rule 3]
• If payment is made to agency supplying of gas, electricity etc.- The value of
the benefit to the employee shall be determined as the sum equal to the amount
paid on that account by the employer to the agency supplying the gas, electric
energy or water.
• If supply is made from resources owned by the employer- The value of
perquisite would be the manufacturing cost per unit incurred by the employer.
Where the employee is paying any amount in respect of such services, the amount so
paid shall be deducted from the value so arrived at.

(F) Valuation of free or concessional educational facilities [Sub-rule (5) of Rule 3]

(i) The value of benefit to the employee resulting from the provision of free or
concessional educational facilities for any member of his household shall be
determined as the sum equal to the amount of expenditure incurred by the
employer in that behalf or
(a) If the educational institution is maintained and owned by the employer or
(b) If free educational facilities are allowed in any other educational institution
by reason of his being in employment of that employer-
the value of the perquisite to the employee shall be determined with reference to
the cost of such education in a similar institution in or near the locality.
Where any amount is paid or recovered from the employee on that account, the
value of benefit shall be reduced by the amount so paid or recovered.
(ii) However, where the educational institution itself is maintained and owned by
the employer and free educational facilities are provided to the children of the
employee or where such free educational facilities are provided in any institution
by reason of his being in employment of that employer, there would be no
perquisite if the cost of such education or the value of such benefit per child does
not exceed ` 1,000 p.m.
(G) Free or concessional tickets [Sub-rule (6) of Rule 3]
The value of any benefit or amenity resulting from the provision by an employer
• who is engaged in the carriage of passengers or goods,
• to any employee or to any member of his household for personal or private
journey free of cost or at concessional fare,
• in any conveyance owned, leased or made available by any other arrangement by
such employer for the purpose of transport of passengers or goods
shall be taken to be the value at which such benefit or amenity is offered by such
employer to the public as reduced by the amount, if any, paid by or recovered from the
employee for such benefit or amenity.
However, there would be no such perquisite to the employees of an airline or the
railways.
(H) Valuation of other fringe benefits and amenities [Sub-rule (7) of Rule 3]
Section 17(2)(viii) provides that the value of any other fringe benefit or amenity as
may be prescribed would be included in the definition of perquisite. Accordingly, the
following other fringe benefits or amenities are prescribed and the value thereof shall
be determined in the manner provided hereunder:-
(i) Interest-free or concessional loan [Sub-rule 7(i) of Rule 3]
(a) The value of the benefit to the assessee resulting from the provision of
interest-free or concessional loan for any purpose made available to
• the employee or

4.60 INCOME TAX LAW
• any member of his household

during the relevant previous year by the employer or any person on his
behalf shall be determined as the sum equal to the interest computed at the
rate charged per annum by the State Bank of India, as on the 1st day of the
relevant previous year in respect of loans for the same purpose advanced by
it on the maximum outstanding monthly balance as reduced by the interest,
if any, actually paid by him or any such member of his household.
“Maximum outstanding monthly balance” means the aggregate
outstanding balance for each loan as on the last day of each month.
(b) However, no value would be charged if such loans are made available for
medical treatment in respect of prescribed diseases (like cancer, tuberculosis,
etc.) or where the amount of loans are not exceeding in the aggregate
` 20,000.
(c) Further, where the benefit relates to the loans made available for medical
treatment referred to above, the exemption so provided shall not apply to
so much of the loan as has been reimbursed to the employee under any
medical insurance scheme.
(ii) Travelling, touring and accommodation [Sub-rule 7(ii) of Rule 3]
(a) If travelling, touring, accommodation etc. expenses are paid or
reimbursed by employer - The value of travelling, touring, accommodation
and any other expenses paid for or borne or reimbursed by the employer
for any holiday availed of by the employee or any member of his household,
other than leave travel concession or assistance, shall be determined as the
sum equal to the amount of the expenditure incurred by such employer in
that behalf.
(b) If travelling, touring, accommodation etc. facilities are maintained by
employer to particular employees only - Where such facility is maintained
by the employer, and is not available uniformly to all employees, the value
of benefit shall be taken to be the value at which such facilities are offered
by other agencies to the public.
(c) Expenses on any member of household accompanying such employee
on office tour - Where the employee is on official tour and the expenses
are incurred in respect of any member of his household accompanying
him, the amount of expenditure so incurred shall also be a fringe benefit or
amenity.
(d) If official tour is extended as vacation - However, where any official tour
is extended as a vacation, the value of such fringe benefit shall be limited
to the expenses incurred in relation to such extended period of stay or
vacation. The amount so determined shall be reduced by the amount, if

any, paid or recovered from the employee for such benefit or amenity.
(iii) Free or concessional food and non-alcoholic beverages [Sub-rule 7(iii) of
Rule 3]
(a) The value of free food and non-alcoholic beverages provided by the
employer to an employee shall be the amount of expenditure incurred by
such employer. The amount so determined shall be reduced by the amount,
if any, paid or recovered from the employee for such benefit or amenity:
(b) However, the following would not be treated as a perquisite -
(1) free food and non-alcoholic beverages provided by such employer
during
• working hours at office or business premises or
• through paid vouchers which are not transferable and usable
only at eating joints,
to the extent the value thereof either case does not exceed fifty rupees
per meal or
(2) tea or snacks provided during working hours or
(3) free food and non-alcoholic beverages during working hours provided
in a remote area or an off-shore installation.
(iv) Value of gift, voucher or token in lieu of such gift [Sub-rule 7(iv) of Rule 3]
(a) The value of any gift, or voucher, or token in lieu of which such gift may be
received by the employee or by member of his household on ceremonial
occasions or otherwise from the employer shall be determined as the sum
equal to the amount of such gift:
(b) However, if the value of such gift, voucher or token, as the case may be,
is below ` 5,000 in the aggregate during the previous year, the value of
perquisite shall be taken as ‘Nil’.
(v) Credit card expenses [Sub-rule 7(v) of Rule 3]
(a) The amount of expenses including membership fees and annual fees
incurred by the employee or any member of his household, which is charged
to a credit card (including any add-on-card) provided by the employer, or
otherwise, paid for or reimbursed by such employer shall be taken to be the
value of perquisite chargeable to tax as reduced by the amount, if any paid
or recovered from the employee for such benefit or amenity.
(b) However, such expenses incurred wholly and exclusively for official purposes
would not be treated as a perquisite if the following conditions are fulfilled.
(1) complete details in respect of such expenditure are maintained by the
employer which may, inter alia, include the date of expenditure and
the nature of expenditure;
4.62 INCOME TAX LAW
(2) the employer gives a certificate for such expenditure to the effect that
the same was incurred wholly and exclusively for the performance of
official duties.
(vi) Club expenditure [Sub-rule 7(vi) of Rule 3]
(a) The value of benefit to the employee resulting from the payment or
reimbursement by the employer of any expenditure incurred (including the
amount of annual or periodical fee) in a club by him or by a member of
his household shall be determined to be the actual amount of expenditure
incurred or reimbursed by such employer on that account. The amount so
determined shall be reduced by the amount, if any, paid or recovered from
the employee for such benefit or amenity.
However, where the employer has obtained corporate membership of the
club and the facility is enjoyed by the employee or any member of his
household, the value of perquisite shall not include the initial fee paid for
acquiring such corporate membership.
(b) Further, if such expenditure is incurred wholly and exclusively for business
purposes, it would not be treated as a perquisite provided the following
conditions are fulfilled:-
(1) complete details in respect of such expenditure are maintained by the
employer which may, inter alia, include the date of expenditure, the
nature of expenditure and its business expediency;
(2) the employer gives a certificate for such expenditure to the effect that
the same was incurred wholly and exclusively for the performance of
official duties.
(c) There would be no perquisite for use of health club, sports and similar
facilities provided uniformly to all employees by the employer.
(vii) Use of moveable assets [Sub-rule 7(vii) of Rule 3]
Value of perquisite is determined as under:
Asset given Value of benefit
(a) Use of laptops and computers Nil
(b) Movable assets, other than - 10% p.a. of the actual cost of such
(i) laptops and computers; and asset, or the amount of rent or charge
(ii) assets already specified paid, or payable by the employer, as
the case may be
Note: Where the employee is paying any amount in respect of such asset, the
amount so paid shall be deducted from the value of perquisite determined above.

(viii) Transfer of moveable assets [Sub-rule 7(viii) of Rule 3]

Value of perquisite is determined as under:
Assets transferred Value of perquisite
Depreciated value of asset [depreciation
Computers and electronic
is computed @ 50% on WDV for each
items
completed year of usage]
Motor cars is computed @ 20% on WDV for each
Any other asset is computed @ 10% on SLM for each
Note: Where the employee is paying any amount in respect of such asset, the
amount so paid shall be deducted from the value of perquisite determined above.
(ix) Other benefit or amenity [Sub-rule 7(ix) of Rule 3]
The value of any other benefit or amenity, service, right or privilege provided by
the employer shall be determined on the basis of cost to the employer under an
arms’ length transaction as reduced by the employee’s contribution, if any.
However, there will be no taxable perquisite in respect of expenses on
telephones including mobile phone actually incurred on behalf of the
employee by the employer i.e., if an employer pays or reimburses telephone
bills or mobile phone charges of employee, there will be no taxable perquisite.
ILLUSTRATION 20
Mr. X retired from the services of M/s Y Ltd. on 31.01.2018, after completing service of 30
years and one month. He had joined the company on 1.1.1988 at the age of 30 years and
received the following on his retirement:
(i) Gratuity ` 6,00,000. He was covered under the Payment of Gratuity Act, 1972.
(ii) Leave encashment of ` 3,30,000 for 330 days leave balance in his account. He was
credited 30 days leave for each completed year of service.
(iii) As per the scheme of the company, he was offered a car which was purchased on
01.02.2015 by the company for ` 5,00,000. Company has recovered ` 2,00,000 from
him for the car. Company depreciates the vehicles at the rate of 15% on Straight
Line Method.
(iv) An amount of ` 3,00,000 as commutation of pension for 2/3 of his pension
commutation.
(v) Company presented him a gift voucher worth ` 6,000 on his retirement.

4.64 INCOME TAX LAW
(vi) His colleagues also gifted him a Television (LCD) worth ` 50,000 from their own
contribution.
Following are the other particulars:
(i) He has drawn a basic salary of ` 20,000 and 50% dearness allowance per month
for the period from 01.04.2017 to 31.01.2018.
(ii) Received pension of ` 5,000 per month for the period 01.02.2018 to 31.03.2018
after commutation of pension.
Compute his gross total income from the above for Assessment Year 2018-19.
SOLUTION
Computation of Gross Total Income of Mr. X for A.Y. 2018-19
Particulars `
Basic Salary = ` 20,000 x 10 2,00,000
Dearness Allowance = 50% of basic salary 1,00,000
Gift Voucher (See Note - 1) 6,000
Transfer of car (See Note - 2) 56,000
Gratuity (See Note - 3) 80,769
Leave encashment (See Note - 4) 1,30,000
Uncommuted pension (` 5000 x 2) 10,000
Commuted pension (See Note - 5) 1,50,000
Taxable Salary /Gross Total Income 7,32,769
Notes:
(1) As per Rule 3(7)(iv), the value of any gift or voucher or token in lieu of gift
received by the employee or by member of his household not exceeding ` 5,000
in aggregate during the previous year is exempt. In this case, the amount was
received on his retirement and the sum exceeds the limit of ` 5,000.
Therefore, the entire amount of ` 6,000 is liable to tax as perquisite.
Note - An alternate view possible is that only the sum in excess of ` 5,000 is taxable
in view of the language of Circular No.15/2001 dated 12.12.2001 that such gifts upto
` 5,000 in the aggregate per annum would be exempt, beyond which it would be
taxed as a perquisite. As per this view, the value of perquisite would be ` 1,000 and
gross taxable income would be ` 7,27,769.
(2) Perquisite value of transfer of car: As per Rule 3(7)(viii), the value of benefit
to the employee, arising from the transfer of an asset, being a motor car, by the
employer is the actual cost of the motor car to the employer as reduced by 20%
of such cost for each completed year during which such motor car was put to use

by the employer on a written down value basis. Therefore, the value of perquisite
on transfer of motor car, in this case, would be:
Particulars `
Purchase price (1.2.2015) 5,00,000
Less: Depreciation @ 20% 1,00,000
WDV on 31.1.2016 4,00,000
Less: Depreciation @ 20% 80,000
WDV on 31.1.2017 3,20,000
Less: Depreciation @ 20% 64,000
WDV on 31.1.2018 2,56,000
Less: Amount recovered 2,00,000
Value of perquisite 56,000
The rate of 15% as well as the straight line method adopted by the company for
depreciation of vehicle is not relevant for calculation of perquisite value of car in
the hands of Mr. X.
(3) Taxable gratuity
Particulars `
Gratuity received 6,00,000
Less : Exempt under section 10(10) - Least of the following:
(i) Notified limit = ` 10,00,000
(ii) Actual gratuity = ` 6,00,000
(iii) 15/26 x ` 30,000 x 30 = ` 5,19,231 5,19,231
Taxable Gratuity 80,769
(4) Taxable leave encashment
Particulars `
Leave Salary received 3,30,000
Less : Exempt under section 10(10AA) - Least of the
following:
(i) Notified limit ` 3,00,000
(ii) Actual leave salary ` 3,30,000
(iii) 10 months x ` 20,000 ` 2,00,000
(assuming that dearness allowance does not form part of
pay for retirement benefit)

4.66 INCOME TAX LAW
Particulars `
(iv) Cash equivalent of leave to his credit ` 2,20,000
2,00,000
Taxable Leave encashment 1,30,000

Note – It has been assumed that dearness allowance does not form part of salary for
retirement benefits. In case it is assumed that dearness allowance forms part of pay
for retirement benefits, then, the third limit for exemption under section 10(10AA) in
respect of leave encashment would be ` 3,00,000 (i.e. 10 x ` 30,000) and the fourth limit
` 3,30,000, in which case, the taxable leave encashment would be ` 30,000
(` 3,30,000- ` 3,00,000). In such a case, the gross total income would be ` 6,32,769.
(5) Commuted Pension
Since Mr. X is a non-government employee in receipt of gratuity, exemption
under section 10(10A) would be available to the extent of 1/3rd of the amount of
the pension which he would have received had he commuted the whole of the
pension.
Particulars `
Amount received 3,00,000
Exemption under section 10(10A) 1,50,000
Taxable amount 1,50,000

(6) The taxability provisions under section 56(2)(x) are not attracted in respect of
television received from colleagues, since television is not included in the
definition of property therein.
ILLUSTRATION 21
Shri Bala employed in ABC Co. Ltd. as Finance Manager gives you the list of perquisites
provided by the company to him for the entire financial year 2017-18:
(i) Domestic servant was provided at the residence of Bala. Salary of domestic servant is
` 1,500 per month. The servant was engaged by him and the salary is reimbursed
by the company (employer).
In case the company has employed the domestic servant, what is the value of
perquisite?
(ii) Free education was provided to his two children Arthy and Ashok in a school
maintained and owned by the company. The cost of such education for Arthy is
computed at ` 900 per month and for Ashok at ` 1,200 per month. No amount was
recovered by the company for such education facility from Bala.
(iii) The employer has provided movable assets such as television, refrigerator and air-
conditioner at the residence of Bala. The actual cost of such assets provided to the
employee is ` 1,10,000.
(iv) A gift voucher worth ` 10,000 was given on the occasion of his marriage anniversary.
It is given by the company to all employees above certain grade.
(v) Telephone provided at the residence of Shri Bala and the bill aggregating to
` 25,000 paid by the employer.
(vi) Housing loan @ 6% per annum. Amount outstanding on 1.4.2017 is ` 6,00,000.
Shri Bala pays ` 12,000 per month towards principal, on 5th of each month.
Compute the chargeable perquisite in the hands of Mr. Bala for the A.Y. 2018-19.
The lending rate of State Bank of India as on 1.4.2017 for housing loan may be taken as
10%.
SOLUTION
Taxability of perquisites provided by ABC Co. Ltd. to Shri Bala
(i) Domestic servant was employed by the employee and the salary of such domestic
servant was paid/reimbursed by the employer. It is taxable as perquisite for all
categories of employees.
Taxable perquisite value = ` 1,500 × 12 = ` 18,000.
If the company had employed the domestic servant and the facility of such servant
is given to the employee, then the perquisite is taxable only in the case of specified
employees. The value of the taxable perquisite in such a case also would be
` 18,000.
(ii) Where the educational institution is owned by the employer, the value of
perquisite in respect of free education facility shall be determined with reference
to the reasonable cost of such education in a similar institution in or near the
locality. However, there would be no perquisite if the cost of such education per
child does not exceed ` 1,000 per month.
Therefore, there would be no perquisite in respect of cost of free education provided
to his child Arthy, since the cost does not exceed ` 1,000 per month.
However, the cost of free education provided to his child Ashok would be taxable,
since the cost exceeds ` 1,000 per month. The taxable perquisite value would be
` 14,400 (` 1,200 × 12).
Note – An alternate view possible is that only the sum in excess of ` 1,000 per
month is taxable .In such a case, the value of perquisite would be ` 2,400.
(iii) Where the employer has provided movable assets to the employee or any

4.68 INCOME TAX LAW
member of his household, 10% per annum of the actual cost of such asset owned
or the amount of hire charges incurred by the employer shall be the value of
perquisite. However, this will not apply to laptops and computers. In this case, the
movable assets are television, refrigerator and air conditioner and actual cost of
such assets is ` 1,10,000.
The perquisite value would be 10% of the actual cost i.e., ` 11,000, being 10% of
` 1,10,000.
(iv) The value of any gift or voucher or token in lieu of gift received by the employee
or by member of his household not exceeding ` 5,000 in aggregate during the
previous year is exempt. In this case, the amount was received on the occasion of
marriage anniversary and the sum exceeds the limit of ` 5,000.
Note- An alternate view possible is that only the sum in excess of ` 5,000 is taxable
taxed as a perquisite. As per this view, the value of perquisite would be ` 5,000.
(v) Telephone provided at the residence of the employee and payment of bill by the
employer is a tax free perquisite.
(vi) The value of the benefit to the assessee resulting from the provision of interest-
free or concessional loan made available to the employee or any member of his
household during the relevant previous year by the employer or any person on
his behalf shall be determined as the sum equal to the interest computed at the
rate charged per annum by the State Bank of India (SBI) as on the 1st day of the
relevant previous year in respect of loans for the same purpose advanced by it.
This rate should be applied on the maximum outstanding monthly balance and
the resulting amount should be reduced by the interest, if any, actually paid by
him.
“Maximum outstanding monthly balance” means the aggregate outstanding
balance for loan as on the last day of each month.
The perquisite value for computation is 10% - 6% = 4%
Month Maximum outstanding Perquisite value at
balance as on last date of 4% for the month
month (`) (`)
April, 2017 5,88,000 1,960
May, 2017 5,76,000 1,920
June, 2017 5,64,000 1,880
July, 2017 5,52,000 1,840

Month Maximum outstanding Perquisite value at

balance as on last date of 4% for the month
month (`) (`)
August, 2017 5,40,000 1,800
September, 2017 5,28,000 1,760
October, 2017 5,16,000 1,720
November, 2017 5,04,000 1,680
December, 2017 4,92,000 1,640
January, 2018 4,80,000 1,600
February, 2018 4,68,000 1,560
March, 2018 4,56,000 1,520
Total value of this perquisite 20,880
Total value of taxable perquisite
= ` 74,280 [i.e. ` 18,000 + ` 14,400 + ` 11,000 + ` 10,000 + 20,880].
Note - In case the alternate views are taken for items (ii) & (iv), the total value of
taxable perquisite would be ` 57,280 [i.e., ` 18,000 + ` 2,400 + ` 11,000 + ` 5,000
+ ` 20,880].
(I) Valuation of specified security or sweat equity share for the purpose of
section 17(2)(vi) [Sub-rule (8)]
The fair market value of any specified security or sweat equity share, being an equity
share in a company, on the date on which the option is exercised by the employee,
shall be determined in the following manner -
(1) If shares are listed on recognized stock exchange - In a case where, on the date
of the exercising of the option, the share in the company is listed on a recognized
stock exchange, the fair market value shall be the average of the opening price
and closing price of the share on that date on the said stock exchange.
If shares are listed on more than one recognized stock exchange - However,
where, on the date of exercising of the option, the share is listed on more than
one recognized stock exchanges, the fair market value shall be the average of
opening price and closing price of the share on the recognised stock exchange
which records the highest volume of trading in the share.
If no trading in share on recognized stock exchange - Further, where on the
date of exercising of the option, there is no trading in the share on any recognized
stock exchange, the fair market value shall be—
(a) the closing price of the share on any recognised stock exchange on a date

4.70 INCOME TAX LAW
closest to the date of exercising of the option and immediately preceding

such date; or
(b) the closing price of the share on a recognised stock exchange, which records
the highest volume of trading in such share, if the closing price, as on the date
closest to the date of exercising of the option and immediately preceding
such date, is recorded on more than one recognized stock exchange.
“Closing price” of a share on a recognised stock exchange on a date shall
be the price of the last settlement on such date on such stock exchange.
However, where the stock exchange quotes both “buy” and “sell” prices, the
closing price shall be the “sell” price of the last settlement.
“Opening price” of a share on a recognised stock exchange on a date shall
be the price of the first settlement on such date on such stock exchange.
However, where the stock exchange quotes both “buy” and “sell” prices, the
opening price shall be the “sell” price of the first settlement.
(2) If shares are not listed on recognized stock exchange - In a case where, on
the date of exercising of the option, the share in the company is not listed on a
recognised stock exchange, the fair market value shall be such value of the share
in the company as determined by a merchant banker on the specified date.
For this purpose, “specified date” means,—
(i) the date of exercising of the option; or
(ii) any date earlier than the date of the exercising of the option, not being a date
which is more than 180 days earlier than the date of the exercising.
Note: Where any amount has been recovered from the employee, the same shall be
deducted to arrive at the value of perquisites.
ILLUSTRATION 22
AB Co. Ltd. allotted 1000 sweat equity shares to Sri Chand in June 2017.The shares
were allotted at ` 200 per share as against the fair market value of ` 300 per share on
the date of exercise of option by the allottee viz. Sri Chand. The fair market value was
computed in accordance with the method prescribed under the Act.
(i) What is the perquisite value of sweat equity shares allotted to Sri Chand?
(ii) In the case of subsequent sale of those shares by Sri Chand, what would be the cost
of acquisition of those sweat equity shares?
SOLUTION
(i) As per section 17(2)(vi), the value of sweat equity shares chargeable to tax as

perquisite shall be the fair market value of such shares on the date on which the
option is exercised by the assessee as reduced by the amount actually paid by, or
recovered from, the assessee in respect of such shares.
Particulars `
Fair market value of 1000 sweat equity shares @ ` 300 each 3,00,000
Less: Amount recovered from Sri Chand 1000 shares @ ` 200 2,00,000
each
Value of perquisite of sweat equity shares allotted to Sri 1,00,000
Chand
(ii) As per section 49(2AA),where capital gain arises from transfer of sweat equity
shares, the cost of acquisition of such shares shall be the fair market value which
has been taken into account for perquisite valuation under section 17(2)(vi). (The
provisions of section 49 are discussed in Unit 4: Capital Gains of this chapter)
Therefore, in case of subsequent sale of sweat equity shares by Sri Chand, the
cost of acquisition would be ` 3,00,000.
(J) Valuation of specified security not being an equity share in a company for
the purpose of section 17(2)(vi) [Sub-rule (9)]
The fair market value of any specified security, not being an equity share in a company,
on the date on which the option is exercised by the employee, shall be such value as
determined by a merchant banker on the specified date.
For this purpose, “specified date” means,—
(i) the date of exercising of the option; or
(ii) any date earlier than the date of the exercising of the option, not being a date
which is more than 180 days earlier than the date of the exercising.
Definitions for the purpose of perquisite rules -
The following definitions are relevant for applying the perquisite valuation rules -
Term Meaning
Member of shall include-
household (a) spouse(s),
(b) children and their spouses,
(c) parents, and
(d) servants and dependants;

4.72 INCOME TAX LAW
Term Meaning
Salary includes the pay, allowances, bonus or commission payable monthly
or otherwise or any monetary payment, by whatever name called
from one or more employers, as the case may be, but does not
include the following, namely:-
(a) dearness allowance or dearness pay unless it enters into the
computation of superannuation or retirement benefits of the
employee concerned;
(b) employer’s contribution to the provident fund account of the
employee;
(c) allowances which are exempted from payment of tax;
(d) the value of perquisites specified in clause (2) of section 17 of the
Income-tax Act;
(e) any payment or expenditure specifically excluded under proviso
to sub-clause (iii) of clause (2) or proviso to clause (2) of section
17;
(f) lump-sum payments received at the time of termination of
service or superannuation or voluntary retirement, like gratuity,
severance pay, leave encashment, voluntary retrenchment
benefits, commutation of pension and similar payments;
ILLUSTRATION 23
X Ltd. provided the following perquisites to its employee Mr. Y for the P.Y. 2017-18 –
(1) Accommodation taken on lease by X Ltd. for ` 15,000 p.m. ` 5,000 p.m. is recovered
from the salary of Mr. Y.
(2) Furniture, for which the hire charges paid by X Ltd. is ` 3,000 p.m. No amount is
recovered from the employee in respect of the same.
(3) A Santro Car which is owned by X Ltd. and given to Mr. Y to be used both for official
and personal purposes. All running and maintenance expenses are fully met by the
employer. He is also provided with a chauffeur.
(4) A gift voucher of ` 10,000 on his birthday.
Compute the value of perquisites chargeable to tax for the A.Y. 2018-19, assuming his
salary for perquisite valuation to be ` 10 lakh.

SOLUTION
Computation of the value of perquisites chargeable to tax in the hands of Mr. Y
for the A.Y.2018-19
Particulars Amount in `
(1) Value of concessional accommodation
Actual amount of lease rental paid by X 1,80,000
Ltd.
15% of salary i.e., 15% of ` 10,00,000 1,50,000
Lower of the above 1,50,000
Less: Rent paid by Mr. Y (` 5,000 × 12) 60,000
90,000
Add: Hire charges paid by X Ltd. for
furniture provided for the use of Mr. Y 36,000 1,26,000
(` 3,000 × 12)
(2) Perquisite value of Santro car owned
by X Ltd. and provided to Mr. Y for his 32,400
personal and official use [(` 1,800 +
` 900) × 12]
(3) Value of gift voucher 10,000
Value of perquisites chargeable to tax 1,68,400
(K) Medical facilities (Proviso to section 17(2)
The following medical facilities will not amount to a perquisite:
(i) Value of medical treatment in any hospital maintained by the employer: The
value of any medical treatment provided to an employee or any member of his
family in any hospital maintained by the employer;
(ii) Reimbursement of expenditure actually incurred on medical treatment: Any
sum paid by the employer in respect of any expenditure actually incurred by the
employee on his medical treatment or treatment of any member of his family
• in any hospital maintained by the Government/local authority/any other
hospital approved by the Government for the purpose of medical treatment
of its employees;

4.74 INCOME TAX LAW
• in respect of the prescribed disease or ailments in any hospital approved

by the Chief Commissioner having regard to the prescribed guidelines.
However, in order to claim this benefit, the employee shall attach with his return
of income a certificate from the hospital specifying the disease or ailment for
which medical treatment was required and the receipt for the amount paid to the
hospital.
Thus, the two types of facilities are covered:
(a) payment by the employer for treatment in a Government hospital and
(b) payment by an employer for treatment of prescribed diseases in any hospital
approved by the Chief Commissioner.
(iv) Premium paid to effect an insurance on the health of such employee: Any
premium paid by an employer in relation to an employee to effect an insurance
on the health of such employee. However, any such scheme should be approved
by the Central Government or the Insurance Regulatory Development Authority
(IRDA) for the purposes of section 36(1)(ib).
(v) Premium paid to effect an insurance on the health for the family of an
employee: Any sum paid by the employer in respect of any premium paid by the
employee to effect an insurance on his family under any scheme approved by the
Central Government or the Insurance Regulatory Development Authority (IRDA)
for the purposes of section 80D.
(vi) Reimbursement of expenditure actually incurred on medical treatment to the
extent of ` 15,000: Any sum paid by the employer in respect of any expenditure
actually incurred by the employee on his medical treatment or treatment of any
member of his family to the extent of ` 15,000 in the previous year.
Note: It is important to note that this expenditure need not be incurred either
in the government hospital or for prescribed disease or ailments in a hospital
approved by the Chief Commissioner.
(vii) Amount paid towards expenditure incurred outside India on medical
treatment: Any expenditure incurred by the employer or any sum paid by the
employer on any expenditure actually incurred by the employee on the following:
(a) medical treatment of the employee or any member of the family of such
employee outside India;
(b) travel and stay abroad of the employee or any member of the family of
such employee for medical treatment;
(c) travel and stay abroad of one attendant who accompanies the patient in
connection with such treatment.
Conditions:
1. The perquisite element in respect of expenditure on medical treatment and

stay abroad will be exempt only to the extent permitted by the RBI.
2. The expenses in respect of traveling of the patient and the attendant will be
exempt if the employee’s gross total income as computed before including
the said expenditure does not exceed ` 2 lakh.
Note: For this purpose, family means spouse and children of the individual. Children
may be dependent or independent, married or unmarried. It also includes parents,
brothers and sisters of the individual if they are wholly or mainly dependent upon him.
ILLUSTRATION 24
Compute the taxable value of the perquisite in respect of medical facilities received by Mr.
G from his employer during the P.Y. 2017-18:
Medical premium paid for insuring health of Mr. G ` 7,000
Treatment of Mr. G by his family doctor ` 5,000
Treatment of Mrs. G in a Government hospital ` 25,000
Treatment of Mr. G’s grandfather in a private clinic ` 12,000
Treatment of Mr. G’s mother (68 years and dependant) by family doctor ` 8,000
Treatment of Mr. G’s sister (dependant) in a nursing home ` 3,000
Treatment of Mr. G’s brother (independent) ` 6,000
Treatment of Mr. G’s father (75 years and dependant) abroad ` 50,000
Expenses of staying abroad of the patient and ` 30,000
Limit specified by RBI ` 75,000
SOLUTION
Computation of taxable value of perquisite in the hands of Mr. G
Particulars ` `
Treatment of Mrs. G in a Government hospital -
Treatment of Mr. G’s father (75 years and dependant) 50,000
abroad
Expenses of staying abroad of the patient and 30,000
attendant
80,000
Less: Exempt up to limit specified by RBI 75,000 5,000
Medical premium paid for insuring health of Mr. G -
Treatment of Mr. G by his family doctor 5,000
Treatment of Mr. G’s mother (dependant) by family 8,000
doctor

4.76 INCOME TAX LAW
Particulars ` `
Treatment of Mr. G’s sister (dependant) in a nursing 3,000
home
16,000
Less: Exempt upto ` 15,000 15,000 1,000
Add: Treatment of Mr. G’s grandfather in a private 12,000
clinic
Add: Treatment of Mr. G’s brother (independent) 6,000
Taxable value of perquisite 24,000
Note: Grandfather and independent brother are not included within the meaning of
family of Mr. G.
ILLUSTRATION 25
Ms. Rakhi is an employee in a private company. She receives the following medical
benefits from the company during the previous year 2017-18:
Particulars `
1 Reimbursement of following medical expenses incurred by Ms.
Rakhi
(A) On treatment of her self employed daughter in a private 4,000
clinic
(B) On treatment of herself by family doctor 8,000
(C) On treatment of her mother-in-law dependent on her, in a 5,000
nursing home
2 Payment of premium on Mediclaim Policy taken on her health 7,500
3 Medical Allowance 2,000 per
month
4 Medical expenses reimbursed on her son’s treatment in a 5,000
government hospital
5 Expenses incurred by company on the treatment of her minor son 1,05,000
abroad
6 Expenses in relation to foreign travel and stay of Rakhi and her 1,20,000
son abroad for medical treatment
(Limit prescribed by RBI for this is ` 2,00,000)
Discuss about the taxability of above benefits and allowances in the hands of Rakhi.

SOLUTION
Tax treatment of medical benefits, allowances and mediclaim premium in the
hands of Ms. Rakhi for A.Y. 2018-19
Particulars
1. Reimbursement of medical expenses incurred by Ms. Rakhi
(A) The amount of ` 4,000 reimbursed by her employer for treatment of her
self-employed daughter in a private clinic qualifies for exclusion from
perquisite, subject a maximum of ` 15,000 as per clause (v) of the first
proviso to section 17(2), since daughter falls within the definition of “family”,
even though she is not a dependent. As per the definition of family, the
condition of dependency is relevant only for parents, brothers and sisters
of the individual and not for spouse and children.
(B) The amount of ` 8,000 reimbursed by the employer for treatment of Ms.
Rakhi by family doctor qualifies for exclusion from perquisite, subject to a
maximum of ` 15,000 under clause (v) of the first proviso to section 17(2).
(C) The amount of ` 5,000 reimbursed by her employer for treatment of
her dependant mother-in-law in a nursing home does not qualify for
exclusion upto ` 15,000, since mother-in-law does not fall within the
definition of “family”, even though she is dependent on Ms. Rakhi.
Therefore, the aggregate sum of ` 12,000, specified in (A) and (B) above,
reimbursed by the employer would be excluded from perquisite [since the same
is less than the maximum permissible limit of ` 15,000]. However, the sum of
` 5,000 specified in (C) above is a taxable perquisite.
2. Medical insurance premium of ` 7,500 paid by the employer for insuring health
of Ms. Rakhi is an exempt perquisite as per clause (iii) of the first proviso to
section 17(2).
3. Medical allowance of ` 2,000 per month i.e., ` 24,000 p.a. is a fully taxable
allowance.
4. As per clause (ii)(a) of the first proviso to section 17(2), reimbursement of
medical expenses of ` 5,000 on her son’s treatment in a hospital maintained by
the Government is an exempt perquisite.
5. As per clause (vi) of the first proviso to section 17(2), the following expenditure
& incurred by the employer would be excluded from perquisite subject to certain
6. conditions –
(i) Expenditure on medical treatment of the employee, or any member of the
family of such employee, outside India [` 1,05,000, in this case];
(ii) Expenditure on travel and stay abroad of the employee or any member of
the family of such employee for medical treatment and one attendant who
accompanies the patient in connection with such treatment [` 1,20,000, in
this case].
4.78 INCOME TAX LAW
Particulars
The conditions subject to which the above expenditure would be exempt are as
follows -
(i) The expenditure on medical treatment and stay abroad would be excluded
from perquisite to the extent permitted by Reserve Bank of India;
(ii) The expenditure on travel would be excluded from perquisite only in the case
of an employee whose gross total income, as computed before including the
said expenditure, does not exceed ` 2 lakh.
Assuming that the limit of ` 2 lakh prescribed by RBI pertains to both expenditure
on medical treatment of minor son as well as expenditure on stay abroad of Ms.
Rakhi and her minor son, such expenditure would be excluded from perquisite
subject to a maximum of ` 2 lakh. If such expenditure is less than ` 2 lakh, it
would be fully excluded. The foreign travel expenditure of Ms. Rakhi and her
minor son borne by the employer would be excluded from perquisite only if
the gross total income of Ms. Rakhi, as computed before including the said
expenditure, does not exceed ` 2 lakh.
(L) Payment of premium on personal accident insurance policies
If an employer takes personal accident insurance policies on the lives of employees
and pays the insurance premium, no immediate benefit would become payable and
benefit will accrue at a future date only if certain events take place.
Moreover, the employers would be taking such policy in their business interest only,
so as to indemnify themselves from payment of any compensation. Therefore, the
premium so paid will not constitute a taxable perquisite in the employees’ hands3.
1.4 DEDUCTIONS FROM SALARY

The income chargeable under the head ‘Salaries’ is computed after making the
following deductions:
(1) Entertainment allowance [Section 16(ii)]
(2) Professional tax [Section 16(iii)]
1.4.1 Entertainment allowance
Entertainment allowance received is fully taxable and is first to be included in the salary
and thereafter the following deduction is to be made:
However, deduction in respect of entertainment allowance is available in case of
Government employees. The amount of deduction will be lower of:
(i) One-fifth of his basic salary or
(ii) ` 5,000 or
3 CIT vs. Lala Shri Dhar [1972] 84 ITR 19 (Del.).

(iii) Entertainment allowance received.

Amount actually spent by the employee towards entertainment out of the entertainment
allowance received by him is not a relevant consideration at all.
1.4.2 Professional tax on employment
Professional tax or taxes on employment levied by a State under Article 276 of the
Constitution is allowed as deduction only when it is actually paid by the employee
during the previous year.
If professional tax is reimbursed or directly paid by the employer on behalf of the
employee, the amount so paid is first included as salary income and then allowed as a
deduction u/s 16.
ILLUSTRATION 26
Mr. Goyal receives the following emoluments during the previous year ending 31.03.2018.
Basic pay ` 40,000
Dearness Allowance ` 15,000
Commission ` 10,000
Entertainment allowance ` 4,000
Medical expenses reimbursed ` 25,000
Professional tax paid ` 3,000 (` 2,000 was paid by his employer)
Mr. Goyal contributes ` 5,000 towards recognized provident fund. He has no other income.
Determine the income from salary for A.Y. 2018-19, if Mr. Goyal is a State Government
employee.
SOLUTION
Computation of salary of Mr. Goyal for the A.Y.2018-19
Particulars ` `
Basic Salary 40,000
Dearness Allowance 15,000
Commission 10,000
Entertainment Allowance received 4,000
Employee’s contribution to RPF [Note] -
Medical expenses reimbursed 25,000
Less: Exempt medical expenses 15,000 10,000
Professional tax paid by the employer 2,000
Gross Salary 81,000

4.80 INCOME TAX LAW
Particulars ` `
Less: Deductions under section 16
- under section 16(ii)Entertainment allowance being
lower of :
(a) Allowance received 4,000
(b) One fifth of basic salary [1/5 × ` 40,000] 8,000
(c) Statutory amount 5,000 4,000
- under section 16(iii) Professional tax paid 3,000
Income from Salary 74,000
Note: Employee’s contribution to RPF is not taxable. It is eligible for deduction u/s 80C.
1.5 RELIEF UNDER SECTION 89

(1) On account of arrears of salary or advance salary: Where by reason of any
portion of an assessee’s salary being paid in arrears or in advance or by reason of
his having received in any one financial year, salary for more than twelve months
or a payment of profit in lieu of salary under section 17(3), his income is assessed
at a rate higher than that at which it would otherwise have been assessed, the
Assessing Officer shall, on an application made to him in this behalf, grant such
relief as prescribed. The procedure for computing the relief is given in Rule 21A.
(2) On account of family pension: Similar tax relief is extended to assessees who
receive arrears of family pension as defined in the Explanation to clause (iia) of
section 57.
“Family pension” means a regular monthly amount payable by the employer to
a person belonging to the family of an employee in the event of his death.
(3) No relief at the time of Voluntary retirement or termination of service: No
relief shall be granted in respect of any amount received or receivable by an
assessee on his voluntary retirement or termination of his service, in accordance
with any scheme or schemes of voluntary retirement or a scheme of voluntary
separation (in the case of a public sector company), if exemption under section
10(10C) in respect of such compensation received on voluntary retirement or
termination of his service or voluntary separation has been claimed by the
assessee in respect of the same assessment year or any other assessment year.
ILLUSTRATION 27
In the case of Mr. Hari, who turned 65 years on 28.3.2018, you are informed that the
salary for the previous year 2017-18 is ` 10,20,000 and arrears of salary received is
` 3,45,000. Further, you are given the following details relating to the earlier years to
which the arrears of salary received is attributable to:
Previous year Taxable Salary (`) Arrears now received (`)

2011 – 2012 7,10,000 1,03,000
2012 – 2013 8,25,000 1,17,000
2013 – 2014 9,50,000 1,25,000
Compute the relief available under section 89 and the tax payable for the A.Y. 2018-19.
Note :Rates of Taxes:
Assessment Slab rates of income-tax
Year For resident individuals of the For other resident individuals
age of 60 years or more at any
time during the previous year
Slabs Rate Slabs Rate
2011–12 Upto ` 2,40,000 Nil Upto ` 1,60,000 Nil
` 2,40,000 - ` 5,00,000 10% ` 1,60,000 - ` 5,00,000 10%
` 5,00,000 - ` 8,00,000 20% ` 5,00,000 - ` 8,00,000 20%
Above ` 8,00,000 30% Above ` 8,00,000 30%
2012–13 Upto ` 2,50,000 Nil Upto ` 1,80,000 Nil
` 2,50,000 - ` 5,00,000 10% ` 1,80,000 - ` 5,00,000 10%
` 5,00,000 - ` 8,00,000 20% ` 5,00,000 - ` 8,00,000 20%
Above ` 8,00,000 30% Above ` 8,00,000 30%
2013–14 Upto ` 2,50,000 Nil Upto ` 2,00,000 Nil
` 2,50,000 - ` 5,00,000 10% ` 2,00,000 - ` 5,00,000 10%
` 5,00,000 - ` 10,00,000 20% ` 5,00,000 - ` 10,00,000 20%
Above ` 10,00,000 30% Above ` 10,00,000 30%
Note – Education cess@2% and secondary and higher education cess@1% is attracted
on the income-tax for all the years.
SOLUTION
Computation of tax payable by Mr. Hari for the A.Y.2018-19
Particulars Incl. arrears Excl. ar-
of salary rears of
salary
` `
Current year salary 10,20,000 10,20,000
Add: Arrears of salary 3,45,000
Taxable Salary 13,65,000 10,20,000
Income-tax thereon 2,19,500 1,16,000
4.82 INCOME TAX LAW
Add : Education cess @2% plus SHEC@1% 6,585 3,480

Total payable 2,26,085 1,19,480
Computation of tax payable on arrears of salary if charged to tax in the
respective AYs
A.Y. 2011-12 A.Y. 2012-13 A.Y. 2013-14
Particulars Incl. (`) Excl. (`) Incl. (`) Excl. (`) Incl. (`) Excl. (`)
arrears arrears arrears arrears arrears arrears
Taxable salary 7,10,000 7,10,000 8,25,000 8,25,000 9,50,000 9,50,000
Add: Arrears of 1,03,000 - 1,17,000 - 1,25,000 -
salary
Taxable salary 8,13,000 7,10,000 9,42,000 8,25,000 10,75,000 9,50,000
Tax on the 97,900 76,000 1,34,600 99,500 1,47,500 1,15,000

above
Add: Cess@3% 2,937 2,280 4,038 2,985 4,425 3,450
Tax payable 1,00,837 78,280 1,38,638 1,02,485 1,51,925 1,18,450
Computation of relief under section 89
Particulars ` `
i Tax payable in A.Y.2018-19 on arrears:
Tax on income including arrears 2,26,085
Less : Tax on income excluding arrears 1,19,480 1,06,605
ii Tax payable in respective years on arrears :
Tax on income including arrears (` 1,00,837 + 3,91,400
` 1,38,638 + ` 1,51,925)
Less: Tax on income excluding arrears (` 78,280 +
` 1,02,485 + ` 1,18,450) 2,99,215 92,185
Relief under section 89 - difference between tax 14,420
on arrears in A.Y 2018-19 and tax on arrears in the
respective years
Tax payable for A.Y.2018-19 after relief under section 89
Particulars `
Income-tax payable on total income including arrears of salary 2,26,085
Less : Relief under section 89 as computed above 14,420
Tax payable after claiming relief 2,11,665

ILLUSTRATION 28
Mr. X is employed with AB Ltd. on a monthly salary of ` 25,000 per month and an
entertainment allowance and commission of ` 1,000 p.m. each. The company provides
him with the following benefits:
1. A company owned accommodation is provided to him in Delhi. Furniture costing
` 2,40,000 was provided on 1.8.2017.
2. A personal loan of ` 5,00,000 on 1.7.2017 on which it charges interest @ 6.75% p.a.
The entire loan is still outstanding. (Assume SBI rate of interest to be 12.75% p.a.)
3. His son is allowed to use a motor cycle belonging to the company. The company
had purchased this motor cycle for ` 60,000 on 1.5.2014. The motor cycle was
finally sold to him on 1.8.2017 for ` 30,000.
4. Professional tax paid by Mr. X is ` 2,000.
Compute the income from salary of Mr. X for the A.Y. 2018-19.
SOLUTION
Computation of Income from Salary of Mr. X for the A.Y.2018-19
Particulars ` `
Basic salary [` 25,000 × 12] 3,00,000
Commission [` 1,000 × 12] 12,000
Entertainment allowance [` 1,000 × 12] 12,000
Rent free accommodation [Note 1] 48,600
Add : Value of furniture [` 2,40,000 × 10% p.a. for 8 16,000 64,600
months]
Interest on personal loan [Note 2] 22,500
Use of motor cycle [` 60,000 × 10% p.a. for 4 months] 2,000
Transfer of motor cycle [Note 3] 12,000
Less: Deduction under section 16(iii)
Professional tax paid 2,000
Income from Salary 4,23,100
Note 1: Value of rent free unfurnished accommodation
= 15% of salary for the relevant period
= 15% of (` 3,00,000 + ` 12,000 + ` 12,000) = ` 48,600
Note 2: Value of perquisite for interest on personal loan
= [` 5,00,000 × (12.75% - 6.75%) for 9 months] = ` 22,500

4.84 INCOME TAX LAW
Note 3: Depreciated value of the motor cycle

= Original cost – Depreciation @ 10% p.a. for 3 completed years.
= ` 60,000 – (` 60,000 × 10% p.a. × 3 years) = ` 42,000.
Perquisite = ` 42,000 – ` 30,000 = ` 12,000.
1.6 SALARY FROM UNITED NATIONS

ORGANISATION
Section 2 of the United Nations (Privileges and Immunities) Act, 1947 grants exemption
from income-tax to salaries and emoluments paid by the United Nations to its
officials. Besides salary, any pension covered under the United Nations (Privileges and
Immunities) Act and received from UNO is also exempt from tax.
EXERCISE
Question 1
Mr. Balaji, employed as Production Manager in Beta Ltd., furnishes you the following
information for the year ended 31.03.2018:
(i) Basic salary upto 31.10.2017 ` 50,000 p.m.
Basic salary from 01.11.2017 ` 60,000 p.m.
Note: Salary is due and paid on the last day of every month.
(ii) Dearness allowance @ 40% of basic salary.
(iii) Bonus equal to one month salary. Paid in October 2017 on basic salary plus
dearness allowance applicable for that month.
(iv) Contribution of employer to recognized provident fund account of the
employee@16% of basic salary.
(v) Profession tax paid ` 3,000 of which ` 2,000 was paid by the employer.
(vi) Facility of laptop and computer was provided to Balaji for both official and personal
use. Cost of laptop ` 45,000 and computer ` 35,000 were acquired by the company
on 01.12.2017.
(vii) Motor car owned by the employer (cubic capacity of engine exceeds 1.60 litres)
provided to the employee from 01.11.2017 meant for both official and personal use.
Repair and running expenses of ` 45,000 from 01.11.2017 to 31.03.2018, were fully
met by the employer. The motor car was self-driven by the employee.
(viii) Leave travel concession given to employee, his wife and three children (one daughter
aged 7 and twin sons aged 3). Cost of air tickets (economy class) reimbursed by the
employer ` 30,000 for adults and ` 45,000 for three children. Balaji is eligible for
availing exemption this year to the extent it is permissible in law.

Compute the salary income chargeable to tax in the hands of Mr. Balaji for the assessment
year 2018-19.
Answer
Computation of Taxable Salary of Mr. Balaji for A.Y. 2018-19
Particulars `
Basic salary [(` 50,000 × 7) + (` 60,000 × 5)] 6,50,000
Dearness Allowance (40% of basic salary) 2,60,000
Bonus (` 50,000 + 40% of ` 50,000) (See Note 1) 70,000
Employers contribution to recognised provident fund in excess of 26,000
12% of salary = 4% of ` 6,50,000 (See Note 4)
Professional tax paid by employer 2,000
Perquisite of Motor Car (` 2,400 for 5 months) (See Note 5) 12,000
Less: Deduction under section 16
Professional tax (See Note 6) 3,000
Taxable Salary 10,17,000
Notes:
1. Since bonus was paid in the month of October, the basic salary of ` 50,000 for the
month of October is considered for its calculation.
2. As per Rule 3(7)(vii), facility of use of laptop and computer is an exempt perquisite,
whether used for official or personal purpose or both.
3. Mr. Balaji can avail exemption under section 10(5) on the entire amount of
` 75,000 reimbursed by the employer towards Leave Travel Concession since the
same was availed for himself, his wife and three children and the journey was
undertaken by economy class airfare. The restriction imposed for two children
is not applicable in case of multiple births which take place after the first child.
It is assumed that the Leave Travel Concession was availed for journey within
India.
4. It is assumed that dearness allowance does not form part of salary for computing
retirement benefits.
5. As per the provisions of Rule 3(2), in case a motor car (engine cubic capacity
exceeding 1.60 liters) owned by the employer is provided to the employee
without chauffeur for personal as well as office use, the value of perquisite shall
be ` 2,400 per month. The car was provided to the employee from 01.11.2017,
therefore the perquisite value has been calculated for 5 months.
6. As per section 17(2)(iv), a “perquisite” includes any sum paid by the employer in
4.86 INCOME TAX LAW
respect of any obligation which, but for such payment, would have been payable
by the assessee. Therefore, professional tax of ` 2,000 paid by the employer is
taxable as a perquisite in the hands of Mr. Balaji. As per section 16(iii), a deduction
from the salary is provided on account of tax on employment i.e. professional tax
paid during the year.
Therefore, in the present case, the professional tax paid by the employer on
behalf of the employee ` 2,000 is first included in the salary and deduction of the
entire professional tax of ` 3,000 is provided from salary.
Question 2
From the following details, find out the salary chargeable to tax for the A.Y. 2018-19 -
Mr. X is a regular employee of Rama & Co., in Gurgaon. He was appointed on 1.1.2017 in
the scale of ` 20,000 - ` 1,000 - ` 30,000. He is paid 10% D.A. & Bonus equivalent to one
month pay based on salary of March every year. He contributes 15% of his pay and D.A.
towards his recognized provident fund and the company contributes the same amount.
He is provided free housing facility which has been taken on rent by the company at
` 10,000 per month. He is also provided with following facilities:
(i) Facility of laptop costing ` 50,000.
(ii) Company reimbursed the medical treatment bill of his brother of ` 25,000, who is
dependent on him.
(iii) The monthly salary of ` 1,000 of a house keeper is reimbursed by the company.
(iv) A gift voucher of ` 10,000 on the occasion of his marriage anniversary.
(v) Conveyance allowance of ` 1,000 per month is given by the company towards
actual reimbursement.
(vi) He is provided personal accident policy for which premium of ` 5,000 is paid by the
company.
(vii) He is getting telephone allowance @ ` 500 per month.
(viii) Company pays medical insurance premium of his family of ` 10,000.
Answer
Computation of taxable salary of Mr. X for A.Y. 2018-19
Particulars `
Basic pay [(` 20,000×9) + (` 21,000×3)] = ` 1,80,000 + ` 63,000 2,43,000
Dearness allowance [10% of basic pay] 24,300
Bonus 21,000
Employer’s contribution to Recognized Provident Fund in excess of
12% (15%-12% =3% of ` 2,67,300) [See Note 1 below] 8,019
Taxable allowances

Particulars `
Telephone allowance 6,000
Taxable perquisites
Rent-free accommodation [See Note 1 & 2 below] 44,145
Medical reimbursement (` 25,000 - ` 15,000) [See Note 4 below] 10,000
Reimbursement of salary of housekeeper 12,000
Gift voucher [See Note 6 below] 10,000
Salary income chargeable to tax 3,78,464
Notes:
1. It has been assumed that dearness allowance forms part of salary for retirement
benefits and accordingly, the perquisite value of rent-free accommodation and
employer’s contribution to recognized provident fund have been worked out.
2. Where the accommodation is taken on lease or rent by the employer, the value
of rent-free accommodation provided to employee would be actual amount of
lease rental paid or payable by the employer or 15% of salary, whichever is lower.
For the purposes of valuation of rent free house, salary includes:
(i) Basic salary i.e., ` 2,43,000
(ii) Dearness allowance (assuming that it is included for calculating retirement
benefits) i.e. ` 24,300
(iii) Bonus i.e., ` 21,000
(iv) Telephone allowance i.e., ` 6,000
Therefore, salary works out to
` 2,43,000 + ` 24,300 + ` 21,000 + ` 6,000 = ` 2,94,300.
15% of salary = ` 2,94,300 × 15/100 = ` 44,145
Value of rent-free house = Lower of rent paid by the employer (i.e. ` 1,20,000) or
15% of salary (i.e., ` 44,145).
Therefore, the perquisite value is ` 44,145.
3. Facility of use of laptop is not a taxable perquisite.
4. Clause (v) of the proviso to section 17(2) exempts any sum paid by the employer
in respect of any expenditure actually incurred by the employee on his medical
treatment or treatment of any member of his family to the extent of ` 15,000.
Therefore, in this case, the balance of ` 10,000 (i.e., ` 25,000 – ` 15,000) is a
taxable perquisite. Medical insurance premium paid by employer is exempt.
5. Conveyance allowance is exempt since it is based on actual reimbursement for
official purposes.

4.88 INCOME TAX LAW
6. The value of any gift or voucher or token in lieu of gift received by the employee
or by member of his household below ` 5,000 in aggregate during the previous
year is exempt. In this case, the gift voucher was received on the occasion of
marriage anniversary and the sum exceeds the limit of ` 5,000.
Note - An alternate view possible is that only the sum in excess of ` 5,000 is taxable
taxed as a perquisite. As per this view, the value of perquisite would be ` 5,000.
7. Premium of ` 5,000 paid by the company for personal accident policy is not liable
to tax.
Question 3
Mr. M is an area manager of M/s N. Steels Co. Ltd. During the financial year 2017-18, he
gets the following emoluments from his employer:
Particulars
Basic Salary
Up to 31.8.2017 ` 20,000 p.m.
From 1.9.2017 ` 25,000 p.m.
Transport allowance ` 2,000 p.m.
Contribution to recognised provident fund 15% of basic salary
Children education allowance (Total) ` 500 p.m. for two children
City compensatory allowance ` 300 p.m.
Hostel expenses allowance (Total) ` 380 p.m. for two children
Tiffin allowance (actual expenses ` 3,700) ` 5,000 p.a.
Tax paid on employment ` 2,500
Compute taxable salary of Mr. M for the Assessment year 2018-19.
Answer
Computation of taxable salary of Mr. M. for the Assessment Year 2018-19
Particulars ` `
Basic Salary (` 20,000 x 5) +(` 25,000 x 7) 2,75,000
Transport allowance (` 2,000 x 12) 24,000
Less : Exempt under section 10(14) (` 1,600 x 12) 19,200 4,800
Children education allowance (` 500 x 12) 6,000

Less: Exempt under section 10(14) (` 100 x 2 x 12) 2,400 3,600

Particulars ` `
City Compensatory Allowance (` 300 x 12) 3,600

Hostel Expenses Allowance (` 380 x 12) 4,560
Less: Exempt under section 10(14) (` 300 x 2 x 12 i.e. 4,560 Nil
` 7,200 but restricted to the actual allowance of
` 4,560)
Tiffin allowance (fully taxable) 5,000
Tax paid on employment [See Note Below] 2,500
Employer’s contribution to recognized provident fund 8,250
in excess of 12% of salary (i.e., 3% of ` 2,75,000)
Less : Tax on employment under section 16(iii) 2,500
Taxable salary 3,00,250
Note: Professional tax paid by employer should be included in the salary of Mr. M as a
perquisite since it is discharge of monetary obligation of the employee by the employer.
Thereafter, deduction of professional tax paid is allowed to the employee from his gross
salary.
Question 4
From the following details, find out the salary chargeable to tax of Mr. Anand for the
assessment year 2018-19:
Mr. Anand is a regular employee of Malpani Ltd. in Mumbai. He was appointed on 01-03-
2017 in the scale of ` 25,000 - ` 2,500 - ` 35,000. He is paid dearness allowance (which
forms part of salary for retirement benefits) @ 15% of basic pay and bonus equivalent
to one and a half month’s basic pay as at the end of the year. He contributes 18% of his
salary (basic pay plus dearness allowance) towards recognized provident fund and the
Company contributes the same amount.
He is provided free housing facility which has been taken on rent by the Company at
` 15,000 per month. He is also provided with following facilities:
(i) The Company reimbursed the medical treatment bill of ` 40,000 of his daughter,
who is dependent on him.
(ii) The monthly salary of ` 2,000 of a house keeper is reimbursed by the Company.
(iii) He is getting telephone allowance @ ` 1,000 per month.
(iv) A gift voucher of ` 4,700 was given on the occasion of his marriage anniversary.
(v) The Company pays medical insurance premium to effect an insurance on the health
of Mr. Anand ` 12,000.
(vi) Motor car running and maintenance charges of ` 36,600 fully paid by employer.

4.90 INCOME TAX LAW
(The motor car is owned and driven by Mr. Anand. The engine cubic capacity is
below 1.60 litres. The motor car is used for both official and personal purpose by
the employee.)
(vii) Value of free lunch provided during office hours is ` 2,200.
Answer
Computation of taxable salary of Mr. Anand for A.Y. 2018-19
Particulars `
Basic pay [(` 25,000×11) + (` 27,500×1)] = ` 2,75,000 + ` 27,500 3,02,500
Dearness allowance [15% of basic pay] 45,375
Bonus [` 27,500 × 1.5] 41,250
Employer’s contribution to Recognized Provident Fund in excess of
12% (18% - 12% = 6% of ` 3,47,875) 20,873
Taxable allowances
Telephone allowance 12,000
Taxable perquisites
Rent-free accommodation [See Note 1 below] 60,169
Medical reimbursement (` 40,000 - ` 15,000) [See Note 2 below] 25,000
Reimbursement of salary of housekeeper [` 2,000 × 12] 24,000
Gift voucher [See Note 4 below] -
Motor car owned and driven by employee, running and maintenance 15,000
charges borne by the employer [` 36,600 - ` 21,600 (i.e., ` 1,800 × 12)]
Value of free lunch facility [See Note 5 below] -
Salary income chargeable to tax 5,46,167
Notes:
1. Where the accommodation is taken on lease or rent by the employer, the
value of rent-free accommodation provided to employee would be actual
amount of lease rental paid or payable by the employer or 15% of salary,
whichever is lower.
For the purposes of valuation of rent free house, salary includes:
(i) Basic salary ` 3,02,500
(ii) Dearness allowance ` 45,375
(iii) Bonus ` 41,250
(iv) Telephone allowance ` 12,000
Total ` 4,01,125
15% of salary = ` 4,01,125 × 15/100 = ` 60,169

Value of rent-free house will be

- Actual amount of lease rental paid by employer (i.e. ` 1,80,000) or
- 15% of salary (i.e., ` 60,169),
whichever is lower.
Therefore, the perquisite value is ` 60,169.
2. Any sum paid by the employer in respect of any expenditure actually incurred
by the employee on his medical treatment or treatment of any member of his
family is exempt to the extent of ` 15,000. Therefore, in this case, the balance
of ` 25,000 (i.e., ` 40,000 – ` 15,000) is a taxable perquisite.
3. Medical insurance premium paid by the employer to effect an insurance on
the health of the employee is fully exempt.
4. If the value of any gift or voucher or token in lieu of gift received by the em-
ployee or by member of his household is less than ` 5,000 in aggregate during
the previous year, the perquisite value is Nil. In this case, the gift voucher was
received on the occasion of marriage anniversary and the sum is less than `
5,000. Therefore, the perquisite value of gift voucher, is Nil.
5. Free lunch provided by the employer during office hours is not a perquisite,
assuming that the value does not exceed ` 50 per meal.
Question 5
(i) Mr. Khanna, an employee of IOL, New Delhi, a private sector company, received the
following for the financial year 2017-18:
Sl. No. Particulars `
1. Basic pay 1,20,000
2. House rent allowance 1,00,000
3. Special allowance 30,000
Mr. Khanna was residing at New Delhi and was paying a rent of ` 10,000 a month.
Compute the eligible exemption under section 10(13A) of the Income-tax Act, 1961,
in respect of house rent allowance received.
(ii) If Mr. Khanna opts for rent free accommodation whereby IOL would be paying a rent of
` 10,000 per month to the landlord and recovers a sum of ` 2,500 per month from
Mr. Khanna which was in excess of his entitlement, what will be the perquisite value
in respect of such rent free accommodation?
(iii) Which of the above would be beneficial to Mr. Khanna i.e., house rent allowance or
rent free accommodation?
Answer
(i) The eligible exemption under section 10(13A) in respect of house rent allowance

4.92 INCOME TAX LAW
received would be least of the following:

Particulars ` `
(a) Actual house rent allowance (HRA) received 1,00,000
(b) Excess of rent paid over 10% of basic salary
Rent paid (10,000 x 12) 1,20,000
Less: 10% of basic pay (i.e. 10% of ` 1,20,000) 12,000 1,08,000
(c) 50% of salary (i.e. 50% of ` 1,20,000) 60,000
Least of the above is ` 60,000.
The house rent allowance received by Mr. Khanna would be exempt to the extent of
` 60,000 under section 10(13A). The balance of ` 40,000 is includible in his total
income.
(ii) Perquisite value in respect of concessional accommodation
As per rule 3(1), where the accommodation is taken on lease or rent by the
employer, the actual amount of lease rental paid or payable by the employer or
15% of salary, whichever is lower, as reduced by the rent, if any, actually paid by
the employee is the value of the perquisite.
(a) Actual rent paid by the employer = ` 10,000 x 12 = ` 1,20,000
(b) 15% of salary = 15% of basic pay plus special allowance =
15% of ` 1,50,000 = ` 22,500
Lower of the above is ` 22,500, which should be reduced by the rent of ` 30,000
paid by the employee (i.e.,2,500 × 12 = ` 30,000). The perquisite value is, therefore,
nil.
(iii) We have to see the cash flow from both the options to find out which is more
beneficial.
Particulars ` `
Option 1: HRA 2,50,000
Cash inflows [Basic Pay + HRA + Special
Allowance]
Less: Cash outflows:
Rent paid 1,20,000
Tax (See Working Note 1 below) Nil 1,20,000
Net cash flow 1,30,000
Option 2: Concessional Accommodation
Cash inflows [Basic Pay + Special Allowance] 1,50,000
Less: Cash outflows:

Particulars ` `
Rent recovery 30,000
Tax (See Working Note 2 below) Nil 30,000
Net cash flow 1,20,000
Since the net cash flow is higher in Option 1, Mr. Khanna should opt for HRA,
which would be more beneficial to him.
Working Notes:
1. Computation of tax under Option 1 (HRA):
Particulars `
Salary:
Basic Pay 1,20,000
HRA (taxable) 40,000
Special allowance 30,000
Total salary 1,90,000
Tax on ` 1,90,000 (including cess) Nil
2. Computation of tax under Option 2 (Concessional
accommodation)
Particulars `
Salary:
Basic Pay 1,20,000
Special allowance 30,000
Concessional accommodation Nil
Total salary 1,50,000
Tax on ` 1,50,000 Nil

4.94 INCOME TAX LAW
LET US RECAPITULATE
Basis of Charge [Section 15]
(i) Salary is chargeable to tax either on ‘due’ basis or on ‘receipt’ basis, whichever
is earlier.
(ii) However, where any salary, paid in advance, is assessed in the year of
payment, it cannot be subsequently brought to tax in the year in which it
becomes due.
(iii) If the salary paid in arrears has already been assessed on due basis, the same
cannot be taxed again when it is paid.
Taxability/Exemption of certain Allowances
Section Allowance Exemption
10(13A) House Rent Least of the following is exempt:
Allowance (a) HRA actually received
(b) Rent paid less 10% of salary
(c) 50% of salary, if accommodation is located in
Mumbai, Kolkata, Delhi or Chennai
40% of salary, if the accommodation is
located in any other city.
10(14)(ii) Children ` 100 per month per child upto maximum of two
education children
allowance
Transport ` 1,600 per month (` 3,200 per month for an
allowance for employee who is blind or deaf or dumb or
commuting orthopaedically handicapped)
between
the place of
residence and
the place of duty.
Hostel ` 300 per month per child up to a maximum of
expenditure two children
of employee’s
children

Exemption of Terminal Benefits

Section Component Category of Particulars [Taxability / Exemption under
of salary employee section 10]
10(10) Gratuity Government Fully exempt u/s 10(10)(i)
Non- Least of the following is exempt :
Government (i) ` 10 lacs
(iii) In case of employees covered by the
Payment of Gratuity Act, 1972
15/26 x last drawn salary x number of
completed years or part in excess of six
months
In case of employees not covered by
the Payment of Gratuity Act, 1972
1/2 x average salary of last 10 months
x number of completed years of service
(fraction to be ignored).
10(10A) Pension
Uncommuted Government Fully taxable.
pension & Non-
Government
Commuted Government/
pension local
authorities/ Fully exempt under section 10(10A)(i)
statutory
corporation/
members of
Civil services
/ All-India
services /
Defence
Services.
Other If the employee is in receipt of gratuity
Employees The amount exempt would be one-third of the
amount of commuted pension which he would
have received had he commuted his entire pension.
If the employee is not in receipt of gratuity
The amount exempt would be one-half of the
amount of commuted pension which he would
have received had he commuted his entire
pension.

4.96 INCOME TAX LAW
10(10AA) Leave Salary

Received Government
during service & Non- Fully taxable
Government
Received at Government Fully exempt (at the time of retirement)
the time of
retirement, Non- Least of the following is exempt :
(whether on Government (i) ` 3,00,000
superannu-
ation or (ii) Leave salary actually received
otherwise) (iii) Cash equivalent of leave standing at
the credit of the employee [based
on average salary of last 10 months]
(maximum 30 days for every year of
service)
(iv) 10 months salary (based on average
salary of last 10 months)
10(10B) Retrenchment Least of the following is exempt :
Compensation (i) Compensation actually received.
(ii) ` 5,00,000
(iii) 15/26 × Average salary of last 3 months
× Completed years of service and part
thereof in excess of 6 months
10(10C) Voluntary Central Least of the following is exempt :
Retirement and State (i) Compensation actually received
Compensation Government,
(ii) ` 5,00,000
Public sector
company, (iii) Last drawn salary x 3 months x
any other completed years of service
company, (iv) Last drawn salary x remaining months of
local service
authority,
co-operative
society, IIT
etc.
Section 10(5) [Leave Travel Concession]
Exemption is available for 2 trips in a block of 4 calendar years.
S. No. Journey performed by Exemption
1 Air Amount not exceeding air economy fare by the
shortest route.

2 Any other mode

(i) Where rail service is Amount not exceeding air conditioned first class
available rail fare by the shortest route.
(ii) Where rail service is not
available
a) and public transport Amount equivalent to air conditioned first class rail
does not exist fares by the shortest route
b) but public transport Amount not exceeding the first class or deluxe
exists. class fare by the shortest route.
Provident Funds - Exemption & Taxability provisions
Particulars Recognized PF Unrecognized Statutory Public PF
PF PF
Employer’s Amount in excess of 12% Not taxable Fully N.A.
Contribution of salary is taxable yearly exempt
Employee’s Eligible for deduction u/s Not eligible for Eligible Eligible for
Contribution 80C deduction for deduction
deduction u/s 80C
u/s 80C
Interest Amount in excess of 9.5% Not taxable Fully Fully exempt
Credited p.a. is taxable yearly exempt
Amount Exempt from tax if Employer’s Fully Fully exempt
received on employee served a contribution exempt u/s 10(11)
retirement, continuous period of 5 and interest u/s 10(11)
etc. years or more or retires thereon is
before rendering 5 taxable as salary.
years of service because Employee’s
of reason beyond the contribution
control of the employee. is not taxable.
In other case, it will be Interest on
taxable. employee’s
contribution is
taxable under
income from
other source.

4.98 INCOME TAX LAW
Valuation of Perquisites [Section 17(2) read with Rule 3]

(A) Rent-free residential accommodation
S. Category of Unfurnished accommodation Furnished
No. Employee (C) accommodation
(A) (B) (D)
1 Government License fee determined as per government Value determined under
employee rules as reduced by the rent actually paid column (C)
by the employee. Add: 10% p.a. of the
furniture cost.
However, if the furniture

is hired, then hire
charges payable/paid
should be added to the
value determined under
column (C), as reduced
by charges recovered
from employee.
2 Non- Where accommodation is owned by Value determined

government employer under column (C)
employee Location Perquisite value Add: 10% p.a. of the
In cities having a 15% of salary furniture cost.
population > 25
lacs as per 2001 However, if the
census. furniture is hired,
then hire charges
In cities having a 10% of salary
payable/paid should
population > 10
be added to the value
lacs ≤ 25 lacs as
determined under
per 2001 census.
column (C), as reduced
In other areas 7.5% of salary by charges recovered
The perquisite value should be arrived at from employee.
by reducing the rent, if any, actually paid
by the employee, from the above value.

Where the accommodation is Value determined under

taken on lease or rent by employer column (C)
Lower of the following is taxable: Add: 10% p.a. of the furniture
(a) actual amount of lease rent paid cost.
or payable by employer or
(b) 15% of salary However, if the furniture
The lower of the above should is hired, then hire charges
be reduced by the rent, actually payable/paid should
paid by the employee, to arrive be added to the value
at the perquisite value. determined under column
(C), as reduced by charges
recovered from employee.
(B) Interest free or concessional loan
In respect of any loan given by employer to employee or any member of his household
(excluding for medical treatment for specified ailments or where loans amount in
aggregate does not exceed ` 20,000), the interest at the rate charged by SBI as on
the first day of the relevant previous year at maximum outstanding monthly balance
(aggregate outstanding balance for each loan as on the last day of each month) as
reduced by the interest, if any, actually paid by him or any member of his household.
(D) Use of movable assets by employee/ any member of his household
(i) 10% p.a. of actual cost of asset owned by the employer or the amount of hire
charges incurred by the employer for the asset hired would be the perquisite value.
(ii) There would, however, be no perquisite for use of laptops and computers.
(E) Transfer of movable assets
Perquisite value would be the depreciated value of the asset computed by applying the
rates of depreciation mentioned in the following table, as reduced by any amount paid
by or recovered from the employee.
S. No. Assets Rate of depreciation
1 Computers and electronic 50% of WDV for each completed year of usage
items
2 Motor cars 20% of WDV for each completed year of usage
3 Other assets 10% on SLM for each completed year of usage

4.100 INCOME TAX LAW
(F) Motor car

S. Car Expenses Wholly Wholly Partly personal use
No. owned/ met by official personal use
hired by use
1 Employer Employer Not a Running and cc of Perquisite
perquisite maintenance engine value
expenses, wear
upto 1.6 ` 1,800
and tear or
litres p.m.
hire charges,
driver salary
less amount above 1.6 ` 2,400
charged from litres p.m.
the employee
for such use. If chauffeur is also
provided, ` 900 p.m.
above value.
2 Employee Employer Not a Actual amount Actual amount of
perquisite of expenditure expenditure incurred by
incurred. the employer as reduced
by the perquisite value
arrived at in (1) above.
3 Employer Employee Not a Wear and cc of Perquisite
perquisite tear or hire engine value
charges, driver
upto 1.6 ` 600 p.m.
salary.
litres
above 1.6 ` 900 p.m.
litres
If chauffeur is also
provided, ` 900 p.m.
above value.
Meaning of Salary:
S. Calculation of exemption of Allowance Meaning of salary
No. / Terminal benefit / Valuation of
perquisite
1 Gratuity Basic salary and dearness allowance.
(in case of non-Government employees
covered by the Payment of Gratuity Act,
1972)
2 a) Gratuity (in case of non-

Government employee not
covered by Payment of Gratuity
Act, 1972) Basic salary and dearness allowance,
b) Leave Salary if provided in terms of employment,
and commission calculated as a fixed
c) House Rent Allowance
percentage of turnover.
d) Recognized Provident Fund
e) Voluntary Retirement
Compensation
3 Rent free accommodation and All pay, allowance, bonus or commission
concessional accommodation or any monetary payment by whatever
name called but excludes-
(1) Dearness allowance not forming part
of computation of superannuation or
retirement benefit
(2) employer’s contribution to the
provident fund account of the
employee;
(3) allowances which are exempted from
the payment of tax;
(4) value of the perquisites specified in
section 17(2);
(5) any payment or expenditure
specifically excluded under the
proviso to section 17(2) i.e., medical
expenditure/payment of medical
insurance premium specified therein.
(6) lump-sum payments received at
the time of termination or service
or superannuation or voluntary
retirement.
Deductions from gross salary [Section 16]
(1) Entertainment allowance (allowable only in the case of government
employees) [Section 16(ii)]
Least of the following is allowed as deduction:
(1) ` 5,000
(2) 1/5th of basic salary
(3) Actual entertainment allowance received

(2) Profession tax [Section 16(iii)]

Any sum paid by the assessee on account of tax on employment is allowable as
deduction.
In case profession tax is paid by employer on behalf of employee, the amount paid
shall be included in gross salary as a perquisite and then deduction can be claimed.
Relief when salary is paid in arrears or in advance [Section 89]
Step 1 Calculate tax payable of the previous year in which the arrears/advance
salary is received by considering:
(a) Total Income inclusive of additional salary
(b) Total Income exclusive of additional salary
Step 2 Compute the difference the tax calculated in Step 1 and Step 2 i.e., (a) – (b)
Step 3 Calculate the tax payable of every previous year to which the additional
salary relates:
(a) On total income including additional salary of that particular previous
year
(b) On total income excluding additional salary.
Step 4 Calculate the difference between (a) and (b) in Step 3 for every previous year
to which the additional salary relates and aggregate the same.
Step 5 Relief under section 89(1) = Amount calculated in Step 2 – Amount
calculated in Step 4

TEST YOUR KNOWLEDGE

1. The maximum ceiling limit for exemption under section 10(10) in respect of gratuity
for employees covered by the Payment of Gratuity Act, 1972 is -
(a) ` 10,00,000
(b) ` 5,00,000
(c) ` 3,50,000
(d) ` 3,00,000
2. The maximum ceiling limit for exemption under section 10(10C) with respect to
compensation received on voluntary retirement is -
(a) ` 2,50,000
(b) ` 3,00,000
(c) ` 3,50,000
(d) ` 5,00,000
3. The HRA paid to an employee residing in Patna is exempt up to the lower of actual
HRA, excess of rent paid over 10% of salary and -
(a) 30% of salary
(b) 40% of salary
(c) 50% of salary
(d) 60% of salary
4. Anirudh stays in New Delhi. His basic salary is ` 10,000 p.m., D.A. (60% of which
forms part of pay) is ` 6,000 p.m., HRA is ` 5,000 p.m. and he is entitled to a
commission of 1% on the turnover achieved by him. Anirudh pays a rent of ` 5,500
p.m. The turnover achieved by him during the current year is ` 12 lakhs. The amount
of HRA exempt under section 10(13A) is –
(a) ` 48,480
(b) ` 45,600
(c) ` 49,680
(d) ` 46,800
5. Where there is a decision to increase the D.A. in March, 2018 with retrospective
effect from 1.4.2016, and the increased D.A. is received in April, 2018, the increase
is taxable -
(a) in the previous year 2016-17

(b) in the previous year 2017-18

(c) in the previous year 2018-19
(d) in the respective years to which they relate
6. Rajesh is provided with a rent free unfurnished accommodation, which is owned
by his employer, XY Pvt. Ltd., in New Delhi. The value of perquisite in the hands of
Rajesh is -
(a) 20% of salary
(b) 15% of salary
(c) 10% of salary
(d) 7.5% of salary
7. Anand is provided with furniture to the value of ` 70,000 along with house from
February, 2017. The actual hire charges paid by his employer for hire of furniture is
` 5,000 p.a.. The value of furniture to be included along with value of unfurnished
house for A.Y.2018-19 is-
(a) ` 5,000
(b) ` 7,000
(c) ` 10,500
(d) ` 14,000
8. For the purpose of determining the perquisite value of loan at concessional rate
given to the employee, the lending rate of State Bank of India as on __________ is
required;
(a) 1st day of the relevant previous year
(b) Last day of the relevant previous year
(c) the day the loan is given
(d) 1st day of the relevant assessment year
9. Employer’s contribution to superannuation fund during the previous year 2017-18
is -
(a) subject to fringe benefits in the hands of the employer
(b) fully taxable as perquisite in the hands of the employee
(c) taxable as perquisite in the hands of the employee if it exceeds ` 1.50 lakh.
(d) taxable as perquisite in the hands of the employee if it exceeds ` 1 lakh.

10. The entertainment allowance received by a Government employee is exempt up to

the lower of the actual entertainment allowance received, 1/5th of basic salary and -
a) ` 4,000
b) ` 6,000
c) ` 5,000
d) ` 10,000.
Answers
1. (a) 2. (d) 3. (b) 4. (a) 5. (b) 6. (b)
7. (a) 8. (a) 9. (c) 10. (c)

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CHAPTER 4

Income from Profits and gains Income from

Deeming 46, 46A,

Deductions 48(i), (ii)

Deductions Last proviso

29, 38, 43, 43A,

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

Proforma for computation of income under the head “Salaries”

© The Institute of Chartered Accountants of India

If accommodation taken on lease by the employer

© The Institute of Chartered Accountants of India

Before learning the provisions, it is essential to understand the important concepts

1.2 BASIS OF CHARGE (SECTION 15)

© The Institute of Chartered Accountants of India

1.3 SALARY, PERQUISITE AND PROFITS IN LIEU OF

1.3.1 Meaning of Salary

© The Institute of Chartered Accountants of India

(vii) Provident Fund:

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

April and May, 2017 - Nil, as he stayed with his parents

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

Allowances prescribed for the purposes of section 10(14)(ii)

© The Institute of Chartered Accountants of India

S. Name of Allowance Extent to which

Transport allowance [(` 1,800 – ` 1,600) p.m. × 12 months] ` 2,400

1 Bishamber Dayalv. CIT [1976] 103 ITR 813 (MP).

(2) the value of conveyance facilities including transport allowance,

(2) Annuity or Pension

© The Institute of Chartered Accountants of India

If the employee does not receive any gratuity

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

(b) He is a non-government employee, receiving gratuity ` 5,00,000 at the time

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

Received during Received at the

Least of the following Least of the following

© The Institute of Chartered Accountants of India

Taxable Gratuity ` 4,75,385

(4) Fees, commission, perquisite or profits in lieu of or in addition to any salary

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

Basic Salary : ` 5,000 p.m. (` 1,000 was increased w.e.f. 1.4.2017)

© The Institute of Chartered Accountants of India

(i) Recognised Provident Fund (RPF)

© The Institute of Chartered Accountants of India

A fund constituted under the Employees’ Provident Fund and Miscellaneous

© The Institute of Chartered Accountants of India

in the terms of employment for retirement benefits and commission as a percentage

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

Interest accrued in the RPF @ 13% p.a. 13,000

© The Institute of Chartered Accountants of India

1.3.2 Profits in lieu of salary [Section 17(3)]

(iii) Payment from provident fund or other fund

2 Lachman Dass Vs. CIT [1980] 124 ITR 706 (Delhi)

© The Institute of Chartered Accountants of India

to the extent to which it does not consist of employee’s contributions or interest on

© The Institute of Chartered Accountants of India